World Bank cuts growth outlook but India may improve

World Bank forecast that global GDP will inch up 2.4% this year from 2.3% in 2012
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First Published: Wed, Jan 16 2013. 08 42 AM IST
The World Bank said that it will be essential for India to maintain sound macroeconomic policies, sustain efforts at fiscal consolidation over the medium term, deepen structural reforms, and improve the investment climate for the private sector. Photo: AFP
The World Bank said that it will be essential for India to maintain sound macroeconomic policies, sustain efforts at fiscal consolidation over the medium term, deepen structural reforms, and improve the investment climate for the private sector. Photo: AFP
Updated: Thu, Jan 17 2013. 12 12 AM IST
New Delhi/Washington: The World Bank on Wednesday said the Indian economy will recover in 2013-14 and grow at 6.4%, up a full percentage point from a projected 5.4% growth rate in 2012-13, supported by a gradual improvement in global demand for South Asia’s exports, policy reforms in India, stronger investment activity and a return to normal agricultural production.
Indian finance ministry officials recently said budget preparations for the next fiscal year may take into account a projected growth rate of 6.5-7%.
The International Monetary Fund (IMF) in a separate report released on Wednesday said that under a medium and severe risk scenario, the Indian economy may grow at 6.5% and 5.8%, respectively, in 2013-14.
The World Bank said in its Global Economic Prospects report that four years after the onset of the global financial crisis, the global economy remains fragile and growth in high-income countries is weak. It called on developing countries to focus on raising the growth potential of their economies, while strengthening buffers to deal with risks from the euro area and fiscal policy in the US.
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It estimates the global economy grew at 2.3% in 2012, slower than last June’s projection of 2.5%. Growth is expected to remain broadly unchanged at 2.4% in 2013, before gradually strengthening to 3.1% in 2014 and 3.3% in 2015.
Given a projected weak, albeit gradually strengthening, global economy and a potentially volatile external environment, it will be essential for India to maintain sound macroeconomic policies, sustain efforts at fiscal consolidation over the medium term, deepen structural reforms, and improve the investment climate for the private sector, the World Bank said.
Growth is expected to pick up further to 7.1% and 7.3% in 2014-15 and 2015-16, respectively, reflecting a projected gradual improvement in global demand and expectations of continued policy reforms, the Bank said.
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“A return to normal agricultural production during 2013-15 and an expected revival of mining activity as hold-ups to production in key natural resource-rich states are gradually resolved should boost output in these sectors, providing a tailwind to growth over the forecast horizon,” it said.
But with a general election coming up in India in 2014, there will be pressure for populist spending measures, which may derail efforts towards fiscal consolidation, the Bank said. In addition, if growth turns out to be weaker than anticipated or planned revenue raising measures such as asset sales don’t materialize, it could lead to higher-than-planned budget deficits and rising government debt, with potentially adverse consequences for sovereign creditworthiness.
The Bank said failure of monsoon rains also remains a major risk to its forecasts, which could have adverse implications for rural incomes and employment, food prices, inflation, the fiscal burden of subsidies and overall growth.
With regard to the global economy, it’s being held back by a frustratingly slow economic recovery in developed nations, Reuters reported the World Bank as saying.
It sharply cut the outlook for world growth, forecasting that global gross domestic product (GDP) will inch up 2.4% this year, from 2.3% in 2012. In its last forecast in June, the bank projected global growth would reach 3% in 2013.
According to the report, China is expected to grow 8.4%, 8%, and 7.9% in the years 2013-14, 2014-15 and 2015-16, and all developing countries at 5.5%, 5.7%, and 5.8%, respectively.
The euro zone’s economy is expected to shrink 0.1% in 2013, and grow by 0.9% and 1.4% in the following two years. The US economy is expected to grow by 1.9%, 2.8% and 3% in the three years. Together, the Organisation for Economic Cooperation and Development countries are expected to grow 1.1%, 2% and 2.3% in 2013, 2014, and 2015.
Overall the bank remains subdued on global growth. Andrew Burns, lead author of the bank’s Global Economic Prospects report, said that a recovery the bank had anticipated last year was now expected “closer to the end of the first quarter and into the second quarter of 2013, rather than beginning a little earlier.”
The Bank warned that a drawn-out political battle in the US over raising the government’s borrowing limit and spending cuts could hit growth, spark a loss of confidence in the dollar and unnerve financial markets.
The World Bank also cut its forecast for developing countries, which last year grew at their slowest pace in a decade, to 5.5% in 2013 from 5.9% in the June forecast. It said growth in these countries should slowly pick up, reaching 5.7% next year and 5.8% in 2015.
Before the global financial crisis hit in 2007, developing countries as a whole were chalking up growth rates of around 7.5%
In comparison, growth in advanced economies should reach a very weak 1.3% this year, weighed down by spending cuts, high unemployment and weak consumer and business confidence, the World Bank said. Activity should strengthen next year to 2% and 2.3% in 2015.
While the financial markets were buoyed by measures adopted last year to address the euro-zone debt crisis, the World Bank urged Washington to outline a credible medium-term fiscal plan that “avoids episodes of brinkmanship” over raising the country’s self-imposed debt ceiling.
The White House and the US Congress did agree at the beginning of January to extend tax cuts for American families earning less than $450,000 a year as part of a deal over the so-called fiscal cliff. But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic sending cuts that were postponed until 1 March.
“Policy uncertainty (in the US) has already dampened growth,” the World Bank said. “Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce US and global growth by 2.3% and 1.4% respectively.”
Burns urged developing countries to “maintain a steady hand on monetary policy” and not to react too forcefully to changes in developed countries. He said developing nations should focus on structural polices and investments to support sustained growth.
The Bank said most developing countries were operating at or near “full capacity” and additional efforts to boost output risk hitting inflation speed bumps.
Meanwhile, the World Bank said a decline in China’s unusually high investment rate was not likely to affect global growth over the medium to long term, but warned that a sharp decline could have domestic and global consequences.
World Bank economic simulations suggest that a 10 percentage point deceleration in Chinese investment would cause Chinese GDP growth to slow by about 3 percentage points.
The Bank said a bitter territorial row between China and Japan over islands in the East China Sea has had an impact on Japanese exports to China.
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First Published: Wed, Jan 16 2013. 08 42 AM IST
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