By S Sethuraman
As a leading emerging economy, India is assumed to outshine its peers, notably China, in growth at 7.5 per cent this year and in fiscal 2017, mainly from an expected pick-up in investments due to policy reforms and lower oil prices, as projected by IMF in its World Economic Outlook in April 2015.
Lower oil prices, if allowed to pass through to consumers, would raise real disposable incomes, particularly among poorer households, and help to drive down inflation while limited pass-through to consumers is expected to mute attendant boost to growth, WEO cautions. However, gains assumed to accrue in part to governments may be used to shore up public finances.
IMF Outlook says China has to reduce its current vulnerabilities from previous excesses in real estate credit and investment and the authorities are expected to give greater weight to this correction. Thus, China’s growth is set for a slowdown from 7.4 per cent (against India’s 7.2) in 2014 to 6.8 per cent in 2015 and 6.3 per cent in 2016, significantly lower from India’s estimates.
(IMF has based its India growth estimate based on GDP at market prices with FY 11-12 as base year. RBI recently projected growth in 2015-16 at 7.8 per cent while the Government aims at a growth rate of 8 to 8.5 per cent)
China’s current phase is among the complexities listed – of divergent growth, stronger in advanced economies and lower in EMEs, and increased financial and geo-political risks. In the case of Russia and Brazil, near-recessionary conditions emerge from IMF projections of minus 3.8 per cent and minus one per cent respectively in 2015. Despite slowdown, emerging markets and developing economies together accounted for 70 per cent of global growth in 2014.
Amid complex challenges for all economies, IMF has retained global growth estimate of 3.5 per cent in 2015 with a likely surge to 3.8 per cent in 2016. The world economy continues to encounter legacies of financial crisis and exchange rate swings. Nevertheless, growth could be stronger in advanced economies in 2015 than in emerging and developing economies.
Recent signs of revival have emerged for both eurozone and Japan, both backed by monetary easing. US with a strong recovery so far is projected to grow at 3.1 for 2015 and next year and Euro Zone at 1.5 and 1.6 per cent and Japan 1.0 and 1.2 per cent respectively. Advanced economies as a whole are thus leading the recovery at present.
. On Inflation in India, IMF expects it to remain “close to target” in 2015 and has projected consumer prices at 6.1 per cent in 2015 and 5.7 per cent in 2016. Pressure to raise policy rates by central banks in general is reduced from lower inflation and current account deficits. India’s current account deficit is put at minus 1.3 and minus 1.8 per cent of GDP in 2015-16 and 2016-17.
For the medium term, WEO has called for all nations to aim at raising actual and potential output. This remains a general policy priority. In advanced economies, accommodative monetary policy remains essential to support economic activity and lift inflation expectations.
This view underlines the prevalent fears of recession and deflation in several economies. Notwithstanding its plea for accommodative monetary policy in advanced economies at this stage, IMF expects US Fed to begin its rate increases in the second half of 2015.
On reforms, IMF has emphasised need for investments in infrastructure in most economies, advanced and emerging ones like India, as it would also facilitate implementation of structural reforms. In emerging economies in general, macro-economic space to support growth is limited and, therefore, structural reforms to raise productivity, with varied agendas across countries, are of the essence to sustain potential output.
In the case of India, IMF urges removal of infrastructure bottlenecks in power sector and reforms in education, labour and product markets to raise competitiveness and productivity. The post-election recovery of confidence and low oil prices offer opportunity for such structural reforms, it says.
India’s lead on the fiscal front (deficit cutting) is noted in WEO but monetary policy, it says, should not respond to the decline in headline inflation from the drop in oil prices. However, loosening is called for if the effect of lower oil prices is transmitted to core inflation or inflation expectations. To date, moderating prices are apparent only in narrow categories of consumer basket.
Also, for India and other developing economies, addressing supply bottlenecks by expanding essential infrastructure and raising productivity would increase near-term demand and support resilience to realignments of reserve currencies.
Foreign exchange intervention should remain in toolkit (of central banks) to address disorderly market conditions, especially in cases in which overshooting threatens financial stability.
IMF anticipates growth in emerging markets to pick up in 2016, driving the projected increase in global growth to 3.8 percent. It implies some waning of downward pressures on activity in countries and regions with weak growth in 2015, such as Russia, Brazil, and the rest of Latin America.
There is little comfort to draw from a broader look at the world as a whole. In a sum-up, IMF says geopolitical tensions could intensify, affecting major economies. Disruptive asset price shifts in financial markets remain a concern. Term and other risk premiums in bond markets are still low in historical terms, and the context underlying this asset price configuration—very accommodative monetary policies in the major advanced economies—is expected to start changing in 2015.
India is fairly cushioned to overcome the spillovers from likely turmoils in financial markets A further sharp dollar appreciation could trigger financial tensions elsewhere, particularly in emerging markets. Risks of stagnation and low inflation in advanced economies are still present, notwithstanding the recent upgrade to the near-term growth forecasts for some of these economies, according to WEO.
Low oil prices, a reduction by 40 per cent over late 2014 levels, has fuelled growth across the world and also had beneficial impact on finances in oil-importing countries. To a substantial extent, it has also weighed heavily on the output and incomes of exporting countries and repressed growth in the hydrocarbon sector. Risks of reversal of low oil prices are also not to be ruled out though unlikely in 2015. (IPA Service)