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Better days ahead for global economy

Striking a hopeful note, International Monetary Fund (IMF) sees a ‘gradual strengthening’ of global economy in the new year, as constraints on economic activity ‘start to ease’, and projects global growth at 3.5 per cent in 2013 from 3.2 per cent last year. In a New Year update, IMF, however, maintains broadly its earlier forecasts except in the euro area where mild recession will continue into 2013.

India’s growth is estimated at 5.9 per cent in 2013, seemingly a leap from IMF’s own estimate of 4.5 per cent in 2012, in what could have been the slowest decline in over a decade. For 2014, IMF projects global growth at 4.1 per cent with a corresponding rise in India’s GDP to 6.4 per cent. These rates should be comforting for Finance Minister Chidambaram engaged in fiscal dressing to stave off credit downgrades and propel some investment.

The latest update notes overall an easing of the crisis environment during most of 2012, and says if risks do not materialise and financial conditions continue to improve, global growth could become stronger than forecast (in which case, India can nurse its ambition for a 7-8 per cent growth in the later years of the 12th plan).  China’s growth is projected to rise from 7.8 per cent in 2012 to 8.2 in 2013 and 8.5 per cent in 2014.

Emerging markets and other developing countries which are expected to grow by 5.5 per cent as a group in 2013 and the United States, are the main sources of growth, according to IMF. The current recovery from the third quarter of 2012, is however slow and downside risks remain significant (mainly in the euro area and USA). In emerging market and developing economies, the update underscored the need to rebuild policy room for balancing external downside risks against risks of domestic imbalances.

Current expectations are for US recovery remaining on track with growth projected at 2 per cent this year (after the 2.3 per cent in 2012, helped by a sharp upswing in the third quarter). A supportive financial market environment and the turnaround in the housing market will support consumption growth, IMF notes projecting US growth to rise to three per cent in 2014.

For the United States, the IMF stressed that ‘the priority is to avoid excessive fiscal consolidation in the short term, promptly raise the debt ceiling, and agree on a credible medium-term fiscal consolidation plan, focused on entitlement and tax reform.’ IMF Chief M Christine Lagarde had said recently that in USA ‘all sides should pull together in the national interest, reaching agreement on time on increasing the debt ceiling and on medium-term debt reduction’

Backed by poll ratings, President Obama, triumphantly entering his second term, rejected any bipartisan deal on debt ceiling issue. Republicans not wanting to be held responsible for economic disruption from a likely credit downgrade, are proposing a three month suspension of debt ceiling until mid-May, thus allowing government to keep borrowing to meet financial obligations. However, they would be reserving their fights with White House over spending cuts in the discussions in May on tax reform and medium-term fiscal consolidation.

Referring to the euro area as one region continuing to pose a large downside risk to the global outlook, IMF says ‘the risk of prolonged stagnation in the euro area would rise if the momentum for reform is not maintained’. To head off this risk, it urged continued adjustment programs by the periphery countries, supported by the deployment of euro-zone ‘firewalls’ to prevent contagion as well as further steps toward banking union and fiscal integration.

For Japan, the third largest economy, after USA and China, IMF hopes the stimulus package and further monetary easing would pull the country out of a short-lived recession and boost growth.  While a ‘collapse’ in the world economy has been avoided, the IMF Chief said recently, both advanced economies and emerging economies need to focus on growth - which can deliver jobs.  Global unemployment now stands at more than 200 million people, according to UN agencies, while rate of jobless stands at around eight per cent in USA and over 11 per cent in European Union.

For India, considered the second fastest growing economy in BRICS, IMF had been lowering growth expectations through 2012 because of persisting drags on business sentiment and investment pause and a weaker external environment. It had projected India’s growth to average at five to six per cent in 2012 and 2013.

While Chidambaram has already begun to see ‘green shoots’ of revival with investment flow, the economy is not expected to move toward higher growth until infrastructural constraints are overcome and supply side bottlenecks are credibly removed.  The Prime Minister Manmohan Singh admitted at the Jaipur Congress Chintan Shivir that UPA had not met the challenge of inflation, and promised again steps to bring down the rise in prices. WPI had declined to 7.18 per cent in December but the provisional figure may be revised upwards as has been happening over several months.

The decline has been cited as a compelling factor, along with the continuing stagnation in manufacture, for RBI to consider lowering the policy lending rate (repo) from 8 per cent when it makes the third quarter policy review on 29 January.

Chidambaram has once again reminded RBI of the need to strike a balance between pushing growth and containing inflation, which is what it has been trying to do, however unpalatably so far for the finance minister. (IPA)
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