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Economies face slow recovery

The International Monetary Fund’s (IMF) semi-annual World Economic Outlook sees marginal improvement in global prospects in 2013 with gradual recovery at different speeds in different regions, including emerging markets with China’s growth returning to a healthy pace at 7.8 per cent in 2012 and set to grow eight per cent this year. However, for both advanced and emerging economies, IMF has lowered its January projections, since recovery in advanced economies is on a bumpy road.

For India, the outlook is far from cheerful, as after a sharper downturn to four per cent in 2012, growth is expected to revive to 5.7 per cent (lower than the January estimate of 5.9 per cent) and 6.2 per cent in 2014. This order of growth is based on assumptions of external demand, solid consumption, a better monsoon season and policy improvements. (World Bank and ADB had estimated six per cent for 2013).

At the same time, IMF noted ‘recent stalling’ of investments in emerging economies like India, Brazil and Russia and has attributed it to infrastructure bottlenecks, ‘policy uncertainty and regulatory obstacles’. It cautions that slowdown in capital accumulation would lower potential output in the medium term. In the case of India, WEO points out, fiscal deficits are large and structural impediments to growth are already present.

Growth will rise in India to 5.75 per cent in 2013 as a result of improved external demand and recently implemented pro-growth measures.  But, IMF adds, significant structural challenges would likely lower potential output over the medium term and also keep inflation elevated by regional (Asian) standards. IMF projections for 2013 and 2014 are while GDP rise could be 5.7 and 6.2 per cent respectively, consumer prices would remain at 10.8 and 10.7 per cent while current account deficit – a more disturbing area for our policy-makers – is estimated at  (-) 4.9 and (-) 4.6 per cent of GDP for these two years..

Meanwhile, the decline in WPI inflation to 5.96 per cent in March, a three-year low,  although a provisional figure which usually gets revised up after a couple of months, seems to have caused some jubilation in the finance ministry. This ‘windfall’ as it is seen, merely reflects the base-effect, with high prices already embedded on all products across the spectrum over recent years. This is of considerable relevance to investment pause and lower growth, a factor often sidelined by policy-makers.

Government had been watching WPI rise to near double digits for four years now. Even in March, WPI index for food products and cereals stood at 8.73 per cent and 18.36 per cent. These are of no consequence for the Finance Ministry in its obsessive concern for growth with spending cuts for fiscal consolidation, squeezing revenues not only out of tax assesses with some threats but also aiming at invisible subsidy reductions through the so-called Direct Benefits Transfer to be foisted on targeted groups. Nevertheless, the latest WPI number and the dismal industrial production data would help to reinforce ongoing pressures on the Reserve Bank of India to make significant cuts in its key lending rates – even if these do not get quickly transmitted to borrowers by banks struggling with their own solvency issues – when the Monetary Policy for 2013-2014 is announced on 3 May.

In Asia, IMF notes, growth has already returned to a healthy pace in China where growth is set to accelerate slightly to about eight per cent in 2013, reflecting continued robust domestic demand in both consumption and investment and renewed external demand. Inflation will pick up only modestly to an average of three per cent in 2013.  Meanwhile, China’s GDP unexpectedly slowed to 7.7 per cent in the first quarter of 2013 but it is above the official growth target of 7.5 per cent. Though 2012 growth a 7.8 per cent was the weakest since 1999, Chinese officials point out volatile external markets and government’s tightening to tame property prices and inflation. And they look upon it as stabilising a growth trend with greater domestic consumption, Government not pursuing growth as over-riding priority.

According to IMF’s global forecasts, world output is expected at 3.3 per cent in 2013 and to rise to four per cent in 2014 (in PPP terms). At market-based exchange rates, it would be 2.6 and 3.4 per cent after the lackluster 2.5 per cent growth in 2012.  Global trade which slowed to a little over 2 per cent in 2012 would remain subdued, according to the World Trade Organisation (WTO), as European economies continue to struggle and ‘suppress global import demand’.

IMF itself has projected euro area negative growth in 2013, for the second year in succession (-) 0.3 per cent after last year’s (-) 0.6 per cent.   However, much of the IMF expectation of a relatively stronger revival in most emerging and other developing economies in 2013 is also based on indicators of manufacturing activity which are re-accelerating in emerging market economies (India may be an exception to this) while activity is only beginning to stabilise, held back by major weakness in the euro area periphery and Japan.

Globally, while policy actions have diminished risks of an acute crisis in both Europe and the United States, WEO says, activity is expected to accelerate gradually led by USA where underlying conditions are ‘more supportive of recovery’. IMF draws a sense of relief from two risks not materializing in 2012 – a break-up of euro-zone and sharp fiscal contraction in United States from a plunge off fiscal cliff. (But President Obama struggles to get a bi-partisan deal over a longer-term deficit reduction plan with some revenues and a waiver of debt ceiling).

In many emerging and other developing economies, activity has picked up steam following the sharper-than-expected slowdown in the middle of 2012, helped by policy easing by central banks. Growth is slated to strengthen further this year in Asia, Latin America and sub-Saharan Africa. But, IMF points out, even where central banks have held policy rates constant or cut them, real policy rates have remained well below pre-2008 levels.

In emerging market and developing economies, credit and activity are propelling each other but in many of them, credit expansion has continued at an elevated pace and credit-to-GDP ratios have continued to move up.

With global prospects improving, the main macroeconomic policy challenge in emerging market and developing economies is to recalibrate policy settings to avoid overstimulation and rebuild macroeconomic policy buffers. In addition, policies must address risks from recent, sustained rapid credit growth and high asset prices. (IPA)
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