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Seeking stability

Beyond the immediate challenge of replacing currency in circulation following the November 2016 currency exchange initiative, policy actions should focus on reducing labour and product market rigidities to ease firm entry and exit, expanding the manufacturing base, and gainfully employing the abundant pool of labour

Seeking stability
At last, the eight-year-old crisis is giving way to global output and trade gaining momentum while India's policy-makers seem to be making little progress with easing constraints to investment and growth revival to lift a stagnating economy, let alone job creation to write about.

And the Modi Government's focus is increasingly turning to an outright "pro-poor" agenda, as the Prime Minister kicks off elections in more states, buoyed by BJP's spectacular win in UP. The ruling party is far ahead of any credible opposition visible to challenge its supremacy in the run-up to 2019 for renewal of national mandate, with a target of adding another 120 seats in the next Lok Sabha.
Doubling of farmer incomes, power for all, and houses for all are some of the goals set for 2022 which would see Prime Minister's "New India" emerge. In this milieu, harder issues like restoring credit culture in the highly stressed banking system for providing adequate working capital and reviving corporate investments remain intractable.

IMF's World Economic Outlook, April 2017, notes a cyclical recovery in investment, manufacturing, and trade to raise world growth projections to 3.5 per cent (from 3.1 per cent in 2016) and 3.6 per cent in 2018. Developed economies, chiefly the USA, are growing faster than anticipated while improved outlook is also noticeable in Europe and Japan.

On the other hand, the Outlook notes, emerging market and developing economies have accounted for the bulk of the downward revisions to global growth in recent years and have been a source of uncertainty around the WEO forecasts. Most of the downward revisions to growth have been in China and India, especially during 2011–13.

Whereas China's growth remained strong, reflecting continued policy support, activity has slowed in India, IMF said, "because of the impact of the currency exchange initiative", as well as in Brazil, which has been mired in a deep recession. China has surprised forecasters with a first quarter growth rise in 2017 of 6.9 per cent.

However, economists opine that it could be the peak for the year and that growth trajectory would moderate in the coming quarters. Apparently, high growth was fuelled by Government-led infrastructure spending and property boom. IMF assumes a successful rebalancing of China's economy to lower, but still high, trend growth rates.

For India, the WEO expects an acceleration of activity, resulting from the implementation of necessary structural reforms. But IMF's growth forecast for 2017 at 7.2 per cent is a result of trimming by 0.4 percentage point, from its October forecast, primarily because of the temporary negative consumption shock induced by cash shortages and payment disruptions from the recent currency exchange initiative. For 2018, growth should rise to 7.7 per cent.

According to IMF, medium-term prospects are favourable, with India's growth forecast to rise to about 8 per cent over the medium term due to the implementation of fundamental reforms, loosening of supply-side bottlenecks, and appropriate fiscal and monetary policies. The economy's strong pace in recent years flowed from critical structural reforms, favourable terms of trade and lower external vulnerabilities.

Beyond the immediate challenge of replacing currency in circulation following the November 2016 currency exchange initiative, IMF said, policy actions should focus on reducing labour and product market rigidities to ease firm entry and exit, expanding the manufacturing base, and gainfully employing the abundant pool of labour.

Policy actions should also consolidate the disinflation underway since the collapse in commodity prices through agricultural sector reforms and infrastructure enhancements to ease supply bottlenecks.

India has also been urged to boost financial stability through full recognition of non-performing loans and raising public sector banks' capital buffers as well as securing public finances with well-targeted subsidies and implementation of GST. Globally, inflation is rising on the back of an uptick in commodity prices, and a broad-based increase in headline inflation rates is projected in both advanced and emerging market and developing economies. India has already begun to experience price pressures which could get accentuated depending on the monsoon prospects this year.

In emerging market and developing economies, IMF's WEO says, growth remains uneven and generally below these economies' average performance in 2000–15. Factors weighing on their outlooks include China's transition to a more sustainable pattern of growth that is less reliant on investment and commodity imports.

Also, high debt levels everywhere; sluggish medium-term growth prospects in advanced economies and domestic strife, political discord, and geopolitical tensions in several countries are have become major constraints to orderly growth and progress of world economy.

On protectionism, a "salient threat" that could lead to trade warfare, IMF has warned any broad-based increase in import costs caused by heightened global trade protectionism would put a dent in global output. A possible increase in trade barriers in some, could translate into generally subdued demand growth for emerging market and developing economies, it said.

While IMF sees sure signs of growth gaining momentum, its Economic Counsellor Maurice Obstfeld also poses the question whether it would be sustained. While consumer and business confidence in advanced economies could rise further, the world economy still faces headwinds. For one thing, trend productivity growth remains subdued across the world economy,

One set of uncertainties stems from macroeconomic policies in the two largest economies, USA and China. Given the faster US recovery to an estimated 2.3 and 2.5 per cent for 2017 and 2018, the Fed is ahead of other major central banks in rate hikes. Also, US fiscal policy seems likely to turn more expansionary over the next couple of years.

The resulting inflation could lead to a faster pace of rate rises, sparking sharp dollar appreciation and possible difficulties for emerging and some developing economies. In China, though rebalancing process continues, with declining current account surplus and a larger GDP share of services, any rapid credit growth may cause financial stability problems down the road. IPA

S Sethuraman

S Sethuraman

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