New Delhi: India’s gross domestic product (GDP) will grow 5% in the 2009 calendar year, powered by domestic demand, according to the United Nations Conference on Trade and Development (Unctad).
The pace is slower than the forecast of 6%-plus growth for the fiscal year ending 31 March reiterated by finance minister Pranab Mukherjee on Monday. The growth in India and China, estimated at 7.8%, will be in stark contrast to the global economy, which is expected to contract 2.7%, Unctad said in its Trade and Development Report 2009 released on Monday.
The positive momentum in India will be shared by other nations in the region. The South Asian economies “are feeling the impact of the crisis through reduced capital inflows, lower migrants’ remittances and falling external demand. But since domestic demand accounts for a large and increasing share of total demand, South Asia, particularly India, is expected to see continued growth in 2009,” the report said.
Unctad said concerns over the fiscal deficit and the possibility of higher taxes were “unjustified” because, in a growing economy, government revenue will normally rise sufficiently at constant tax rates. “Adjusting public spending to falling tax revenue might not lead to a lower fiscal deficit either, because the tax base will narrow further and more financial rescue operations might become necessary,” the report said.
India introduced a series of stimulus measures last year to shore up its slowing economy in the wake of the global financial crisis, inflating the fiscal deficit to an estimated 6.8% of GDP in the current fiscal year.
Foreign credit-rating agencies have been apprehensive about the sustainability of such high deficits and a debt-to-GDP ratio close to 80%. Mukherjee said the stimulus packages will continue until the global economy has recovered completely.
Though developing countries have been mostly “innocent bystanders” of the financial and economic crisis, Unctad said they should be aware of the hidden risks of financial development and move with “extreme caution” toward financial sector reform. “The current crisis shows that more sophisticated financial systems require more and not less regulation.”
Unctad also suggested that developing countries substitute foreign currency-denominated public debt with domestic currency-denominated public debt to avoid vulnerabilities to exchange-rate fluctuations. It also advocated a new system of allocating special drawing rights, or SDRs, that favour developing and low-income countries.
SDRs are an international reserve asset created by the International Monetary Fund (IMF) in 1969 to supplement member countries’ official reserves. Their value is based on a basket of four key international currencies.
Jayati Ghosh, professor at the Centre for Economic Studies and Planning in Jawaharlal Nehru University, said conditions attached to IMF loans are similar to those of the past. “This is at odds with many declarations in which coordinated counter-cyclical policies and large fiscal stimulus packages have been recognized as the most effective means to compensate for the fall in aggregate demand,” she said.
The Group of 20 (G-20) nations at a London summit in April had favoured a new general SDR allocation, which would inject $250 billion (Rs12.2 trillion) into the world economy and increase the global availability of cash. Unctad has advocated the allocation of SDRs linked to the need of developing economies for development finance, rather than their quotas in IMF.