Millennium Post

India gets cautionary signals

India gets cautionary signals
Emerging market economies like China, India and Brazil have slowed down, partly reflecting weaker external environment while domestic demand has decelerated sharply in response to 'capacity constraints and policy tightening over the past year', IMF notes in its July Update of World Economic Outlook.

China has certainly run into risks of a hard landing due both to economic and social factors but its rulers, as Premier Wen Jiabao notes, could respond with the required fiscal and monetary responses. IMF projects for China 8 per cent in 2012 and faster at 8.5 per cent in 2013.

But India is shown up in greater discomfort with growth projections more sharply revised down to 6.1 per cent in fiscal 2013 and 6.5 per cent in pre-election fiscal 2014 [by minus 0.7 percentage point for each year from the April estimates]. India has also to tread a delicate path in easing monetary policy in terms of how IMF looks at emerging market inflation and credit pressures.

The downward revisions for emerging economies including Brazil are in the context of continuing threats to global economic recovery from the unresolved euro debt crisis, in the main, and 'excessive fiscal tightening' in USA with high unemployment. Absent corrective steps, growth would stall next year with 'significant spillovers to the rest of the world'. Policymakers should be ready 'to cope with trade declines and the high volatility of capital flows'.

The Update says increases in investor risk aversion and perceived growth uncertainty in many emerging market economies have led not only to equity price declines but also to capital outflows and currency depreciation [which is the case in India]. This apart, IMF refers to concerns of potential growth for emerging economies being lower than expected over the medium term.

Growth in these economies has been above historical trends over the past decade or so, supported in part by financial deepening and rapid credit growth, which may well have generated overly optimistic expectations about potential growth. India has assumed that within a couple of years it would get back to 9 per cent growth.

With lower growth, these economies would make correspondingly a smaller contribution to global growth, IMF says. Also of concern are risks to financial stability after years of rapid credit growth in the current environment of weaker global growth, elevated risk aversion, and some signs of domestic strain.

The Update makes only a small correction for global growth to 3.5 per cent in 2012 (2.7 per cent at marked-based exchange rates) but all its world and country estimates are predicated on two assumptions:

That there will be sufficient policy action to allow financial conditions in the euro area periphery [Spain, Portugal, Greece and the like] to ease gradually and that recent policy easing in emerging market economies will gain traction.

But downside risks continue to loom large reflecting 'risks of delayed or insufficient policy action'. And the Update makes tough calls for both Eurozone and USA. The former to follow up on the positive decisions agreed upon at the June EU leaders’ summit and take action as needed if conditions deteriorate further. It is also assumed the mandatory sharp reduction in US federal deficit ('fiscal cliff') would be modified so as to avoid a large fiscal contraction, which is what President Obama is fighting for with Congressional Republicans.

IMF does not see any early signs of recovery for the world economy with the ratcheting up of financial market and sovereign stress in the euro area periphery to end-2011 levels and with growth in major emerging economies being lower than forecast. However, it points to an easing of global inflation with a fall in oil and commodity prices.  Average oil prices at 104 dollars a barrel is assumed to fall to 101 dollars in 2012.

In the near term, activity in many emerging market economies is expected to be supported by the policy easing that began in late 2011 or early 2012 and, in net fuel importers, by lower oil prices, depending on the extent of the pass-through to domestic retail prices [which is often incomplete]. Brazil, whose growth had plunged from a high of 7.5 per cent in 2010 to 2.7 per cent in 2011 is projected to grow at 2.5 and 4.6 per cent for the next two years. Russia’s growth is roughly maintained at 4 per cent.

USA will likely record low growth of 2 per cent this year and 2.3 per cent next year while EU under recession would be minus 0.3 per cent in 2012 before pickup to 0.7 per cent in 2013.Germany is an exception with growth at 1 and 1.4 per cent for the two years while France and UK would also avoid recession with marginal growth. Japan, recovering from the 2011 Fukushima disaster, is to record 2.4 per cent this year but growth will soften to 1.5 per cent in 2013.

Regional growth for developing Asia will also moderate over the two years at 7.1 and 7.5 per cent respectively, with no revision for ASEAN as a group, but emerging market and other developing countries would still be growing at around 6 per cent as against the 1.4 and 1.9 per cent for advanced economies. Global trade flows are slated to decline to 3.8 per cent over 5.9 per cent in 2011 with possible recovery to 5.1 per cent in 2013.

On China, IMF says given the over-capacity in a number of sectors, there are 'tail risks of a hard landing' in the medium term if investment spending slows more sharply. But with the official target of 7.5 per cent in 2012, Premier Wen Jiabao says the economy is running at 'a slower but more stable pace'. Economic fundamentals remain sound and the country still has huge growth potential, he said.

IMF has urged EU and USA to give top priority to crisis management. EU should follow up recent agreements with measures to create a banking union with a credible commitment toward a robust and complete monetary union. Demand support is essential in the short term to cushion the impact of the region’s adjustment efforts.

Emerging economies, IMF says, should stand ready to adjust policies, given spillovers from weaker advanced economy prospects and slowing export growth and volatile capital flows. Where growth declines have primarily reflected normalisation to trend, policies must avoid rekindling overheating pressures, with due consideration of risks that potential growth could be lower than expected. In economies where inflation and credit pressures have not eased significantly, targeted measures could be considered should bank liquidity or funding pressures arise in the context of the current unsettled global financial environment.
S Sethuraman

S Sethuraman

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