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Growing risks remain

Growing risks remain
Even as the global economy slows down further and recovery remains fragile, India can draw some comfort that its current status as the fastest-growing economy is intact with growth projections retained at 7.5 percent in 2016 and in 2017 in the IMF's World Economic Outlook(WEO) of April 2016.

But the problem for policy-makers is to ensure that even this growth rate, though below India's potential, is not allowed to be jeopardised and that the benefits of growth also get  widely shared, say, in terms of incomes and jobs.  Far from evidence of such gains so far, the Modi Government has entered the third fiscal year amid growing disappointment and a rise in social tensions, especially among the youth.

Finance Minister Arun Jaitley, who is in Washington to attend the IMF-World Bank Spring Meetings (April 15-16) and to meet investors, will no doubt present a highly promising picture of India for doing business with Government commitment to fiscal prudence and determination to push ahead with structural reforms.

Foreign investors are aware of political constraints the Modi Government faces in Parliament, and Jaitley would do well at home to tone down his attacks on the Congress and adopt a somewhat conciliatory approach to be able to get GST and other key economic legislation through the Rajya Sabha. The Congress also cannot hold on to obstruction for long but must find some accommodation for its viewpoint.

The IMF Outlook notes "resilience" of Indian economy and expects growth would continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes. With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth, it says.

Latest indications from the markets are that India's corporate sector may have turned the corner to improve its balance sheets in fiscal 2016. If so, this should augur well for an early revival of corporate investments. Macroeconomic conditions are favourable except for the problems in the financial sector, especially the stressed banking and corporate sectors.

India is one of the principal beneficiaries of low oil prices and with a range of supply-side measures, and a relatively tight monetary stance, there was faster-than-expected fall in inflation, making room for nominal interest rate cuts, but upside risks to inflation could necessitate a tightening of monetary policy, according to the WEO.

Monetary conditions in India remain consistent with achieving the inflation target of 5 percent in the first half of 2017, although an unfavorable monsoon and an expected public sector wage increase pose upside risk. IMF expects CPI to stay at 5.3 percent in both 2016 and 2017. The current account deficit, which is not posing a problem at present, would be low at -1.5 percent of GDP in 2016 but it could rise to -2.1 percent in 2017.

Fiscal consolidation should continue, underpinned by revenue reforms and further reductions in subsidies, IMF urges. Sustaining strong growth over the medium term will require labor market reforms and dismantling of infrastructure bottlenecks, especially in the power sector.

IMF economists have revised down global growth estimates for 2016 and 2017. Global output is estimated to have grown by 3.1 percent in 2015, with 1.9 percent growth for advanced economies and 4.0 percent growth for emerging market and developing economies. World growth is projected to remain modest in 2016, at 3.2 percent, before picking up to 3.5 percent in 2017.

The Outlook says emerging market and developing economies would still account for the lion’s share of world growth in 2016, yet their growth rate is projected to increase only modestly relative to 2015. The factors accounting for the slowdown are weakness in oil-exporting countries, the slowdown in China and a still-weak outlook for exporters of non-oil commodities.

While India has derived significant terms-of-trade windfall gains from the sharp drop in oil prices, which alleviated inflation pressures and reduced external vulnerabilities, it used these gains to strengthen fiscal positions. The lower prices were not passed on to consumers at the retail level.

Raising the question in a general way, IMF agrees whether all the gains should be saved (for the exchequer only) depends on the extent of economic slack, the availability of fiscal space, and country-specific needs. In particular, terms-of-trade gains may provide an opportunity to finance critical structural reforms or growth-enhancing spending.

Finance Minister Jaitley has not told the country how much of the "oil savings” was used for growth-enhancing spending. He would maintain the budget has stepped up public investment in infrastructure. This increase in capital expenditure would also be cited in justification of all the tax and duty increases in the Budget, some hidden, and in the service tax increase and cesses.

China's revised growth estimates for 2016 and 2017 are 6.5 and 6.2 percent respectively. The World Bank, however, estimates growth in 2016 to be 6.7 percent declining to 6.5 percent in 2017. But IMF warns the ongoing rebalancing in China, given its size, high investment and high import content of its investment and exports could have widespread international ramifications.

There could be sizable global spillovers through trade channels, which would impact demand for trading partners' products and on world prices for specific goods, especially china's bulk commodity imports. In turn, these could affect other countries’ exchange rates and asset markets, IMF said pointing to its more than 100 trading partners that account for 80 percent of world GDP.

Further, a stronger pullback of capital flows from countries at risk could tighten financial conditions in emerging market economies and put additional downward pressure on their currencies. IMF noted Indian rupee had so far remained "broadly stable". Average oil price is assumed to be 34.75 dollars a barrel in 2016 and it could rise to 40.99 dollars in 2017.

Global recovery is projected to strengthen in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies start gradually to normalise. But, given increased uncertainty and risks of weaker growth scenarios becoming more tangible, the Outlook has emphasised the urgency of a broad-based policy response to raising growth and managing vulnerabilities. 

(The author is a senior commentator on political and economic affairs. The views expressed are strictly personal.)
S Sethuraman

S Sethuraman

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