Mumbai: The International Monetary Fund (IMF) this week released the latest editions of two flagship report cards on the global economy—the World Economic Outlook and the Fiscal Monitor. The data strewn across these two reports on the state of the Indian economy make for grim reading. Here are five patterns that are worthy of attention.
1. India has seen the worst deterioration in its economic prospects since July, when the IMF issued an update on its April outlook. The forecast for Indian economic growth in 2012 has been cut by 1.3 percentage points, from 6.2% to 4.9%. That is far more than the growth downgrades for the world economy (0.2 percentage points) and emerging market economies (0.3 percentage points). Even an economy such as the UK, which has experienced a sharp downturn in economic activity in recent months, has had its 2012 growth forecast reduced by 0.6 percentage points, half that of India.
2. What can be done? The policy space that the Indian authorities have to deal with the sharp slowdown is extremely small. The new IMF Fiscal Monitor shows that India will have one of the highest levels of fiscal deficits in the world, at 9.5% of gross domestic product (GDP). Japan is the only major economy that does worse; even troubled European economies such as Spain, Ireland and Greece have stronger public finances, thanks to the austerity forced on them by other members of the European Union led by Germany. There is not much space for monetary stimulus in India either, with consumer price inflation (9.7%) far above average Asian levels. In other words, the Indian government has painted itself into a sorry corner.
3. High inflation is one indication that aggregate demand pressures are still high despite the slowdown in the Indian economy. Another indication is the current account deficit. The IMF expects India to end the year with a current account deficit of 3.8% of GDP. Once again, this is way out of line when compared with other major Asian economies. The high fiscal and current account deficits indicate serious macroeconomic imbalances that could put the Indian economy at risk in case there is another global shock.
4. One good indication of how much economic momentum India has lost in recent quarters is a comparison of growth rates with other economies in the region. The expected growth rate for the Indian economy in 2012 is lower than the Asian average, and far lower than the average (6.7%) for developing Asia. India is being outpaced by not only China, but also other Asian neighbours such as Indonesia, Thailand (albeit, thanks to a low 2011 base for that country after the floods there) and Vietnam. The Philippines economy is now growing at nearly the same pace as India. In other words, with weak growth and high deficits, India seems far less healthy than other regional economies.
5. The value of Indian economic output in 2012 will be $1.95 trillion at market prices and $2.12 trillion in 2013. That makes it one of the 10 largest economies in the world. India has already overtaken several rich countries such as Canada as far as the size of its economy goes. It is now on par with Russia. Next target: Italy, which it is likely to overtake next year. But faster economic growth is essential if the distance with the economic superpowers is to be reduced rapidly, as well as creating a robust economy that offers ample opportunities to 1.2 billion Indians. The way to ensure this is not temporary is monetary and fiscal stimulus; it is through more structural changes such as an investment revival, a new wave of reforms, higher investment in human capital and better infrastructure.