By S. Sethuraman
India’s economy will remain in slowdown in 2012 at an estimated 6.9 per cent, after 7.2 per cent in 2011, with its twin deficits and risk to fiscal balance from energy subsidies while elevated inflation puts the country in a group of emerging economies, barring China, where more monetary tightening may be needed, according to IMF’s World Economic Outlook.
This comes a day after RBI, which held fast to tightening for over two years, has begun to unfasten the belt but with due caution of impending risks. But India remains above the G-20 average in at least high inflation and fiscal deficits. Still India remains the second fastest growing, after China, in developing Asia which is to grow by 7.3 and 7.9 per cent for the two years 2012 and 2013.
Apart from slackening external demand, domestic factors have also contributed to India’s slowdown, IMF notes. Deterioration in business sentiment weakened investment and policy tightening raised borrowing costs, the Outlook said. While slowdown to around 7 per cent growth in 2012 is cyclical response to higher interest rates and lower external demand, policy uncertainties and supply bottlenecks are playing a role and would need to be tackled in the near term to ensure that potential growth does not diminish.
The economy is, however, projected to grow 7.3 per cent in 2013 and the Fund’s other estimates are consumer prices rising by 8.2 and 7.3 per cent during 2012 and 2013. The current account deficits for these two years likely are -3.2 and -2.9 per cent of GDP.
General government (fiscal) deficits would slowly decline from -8.7 per cent in 2011 to -8.3 per cent in 2012 and -8.2 per cent in 2013. Focus on containing non-priority expenditure would boost public investment, especially in health.
These forecasts are to be viewed in the context of a global economy which, though improving relative to the last quarter of 2011, is still fragile. Despite positive signs in US economy, bolder policy measures in the housing market could help accelerate recovery. Arcimony in the Congress on extending temporary policy measures and inability to agree on a medium-term fiscal consolidation strategy could undermine further confidence and outcomes.
US economy is to improve its growth from 1.4 per cent in 2011 to 2 per cent this year while inflation remains well within 2 per cent but unemployment at 8.2 per cent would fall only gradually to 7.9 per cent next year In the euro area, sovereign spreads and banking systems are expected to remain volatile and would settle down gradually, the Outlook said. The euro area as a whole (17 countries) would be in minor recession with -0.3 per cent in 2012 and growth could record 0.9 per cent in 2013.
Global economic growth is projected at 3.5 per cent in 2012, moderating from 2011, and rise to 4.1 per cent next year. At market-based exchange rates, growth for the two years would be 2.7 per cent in 2012 and 3.3 per cent in 2013. There would also be a further slowdown in world trade in goods and services from 5.8 per cent in 2011 to 4.0 per cent this year and would recover to 5.6 per cent in 2013.
Asia has weathered the downturn well and looks headed for soft landing in 2012. China’s growth rates also would be lower at 8.2 and 8.8 per cent for the two years from the recorded 9.2 per cent in 2011. Economies with diminishing inflation like China and Mexico can afford to hold rates steady although China has to manage lending to overheated sectors like real estate.
In emerging Asia including India, strengthening domestic demand will require improving conditions for private investment including by addressing infrastructure bottlenecks and enhancing governance and public service delivery. China’s market, in the absence of other external demand, provides a buffer to the region’s commodity exporters while domestic demand would remain strong in some parts of developing Asia.
For India, the outgo on subsidy could be contained by narrowly targeting them for the most vulnerable households. In the uncertain global environment, managing volatile capital flows would be another policy challenge for many emerging market economies. Brazil and India has rolled back the level of taxes on certain inflows and restrictions as capital flows slackened. IMF also suggests for most emerging economies to continue to rebuild room for fiscal policy space to meet crisis situations. (IPA Service)