New Delhi / Istanbul: India and China will lead the world out of a deep recession in 2010 but the global recovery could be sluggish, the International Monetary Fund, or IMF, said on Thursday in the latest edition of the World Economic Outlook, its bi-annual report on the world economy.
The multilateral lender kept its growth forecast for India in 2009 unchanged at 5.4% while it cut its projection for growth in 2010 by a tenth of a percentage point to 6.4% compared with its July estimate of 6.5%. IMF offers forecasts for the calendar year rather than the fiscal year.
In contrast, it raised China’s growth forecast to 8.5% in 2009 from the earlier 7.5% projection and to 9% in 2010 from the July estimate of 8.5%.
Pronab Sen, chief statistician of India, said he does not agree with IMF’s India projections. “They are being unnecessarily pessimistic,” he said. Though Sen said he does not have a forecast for India’s growth in 2010, “much will depend upon what happens in the outside world. World opinion at present is throwing lots of different numbers,” he said. The government expects the economy to grow at least 6% in fiscal 2009-10.
IMF also said that consumer price inflation in India will average 8.7% in 2009 and 8.4% in 2010. It also maintained that India’s current account deficit may touch 2.2% of India’s gross domestic product in 2009 and 2.5% in 2010.
Safe side: A shopping mall in New Delhi. IMF says India has escaped a severe recession because its economy is less dependent on demand from foreign consumers than many other Asian countries. Ramesh Pathania / Mint
Sen said it is difficult to comment on the inflation figures. “If the rupee strengthens, it will have a strong mitigating factor on the inflation front,” he said. However, he said he does not expect the current account deficit to cross 1.5% this year, “unless something exceptional happens”.
IMF said India escaped a severe recession because its economy is less dependent on demand from foreign consumers than many other Asian countries. “Extensive fiscal and monetary support helped ease tensions in financial markets and helped soften the decline in domestic demand, even bolstering demand in China and India,” it said.
The fund also declared that the global recession is ending and raised its forecast for global economic growth next year, after a year of being downbeat about prospects for the world economy.
“The global economy appears to be expanding again, pulled up by the strong performance of Asian economies, and stabilization or modest recovery elsewhere,” the IMF said.
The fund said it now expects the world economy to contract by 1.1% in 2009 before growing by 3.1% in 2010. This is more upbeat than its last update in July when it projected the world economy would shrink 1.4% in 2009, before expanding 2.5% in 2010.
In the four years starting at the end of 2010, global growth is expected to average a little more than 4% a year, below the 5% average annual growth before the financial crisis erupted, the IMF report said.
While advanced economies will contract this year, they will begin a fragile recovery in 2010, the report said. Both the US and the euro area will post growth, albeit at a tepid pace, next year, it added.
Spain will be the only euro area member whose economy will contract next year, IMF said, adding that the pace of the economic decline in Europe has started to moderate.
In contrast, emerging and developing economies are further ahead in the recovery and will expand by 1.5% this year before rebounding 5% next year led by China and India, it said, also noting signs of stabilization in Latin America.
The fund said the recovery in eastern Europe, which was hardest hit by the financial crisis, will lag other emerging economies, especially the Baltic nations Latvia, Lithuania and Estonia.
Still, IMF cautioned that the pace of the overall global recovery is expected to be sluggish for quite some time and the biggest risk is if governments withdraw their support too soon, causing the recovery to stall.
It urged policymakers not to disrupt the recovery by relaxing efforts to strengthen the financial sector and by prematurely withdrawing expansionary economic policies.
IMF said governments should stand ready to roll out new initiatives if risks to growth materialize. At the same time, governments should also commit to large reductions in deficits once the recovery is on a more solid footing.
In major economies, authorities can still afford to maintain accommodative conditions for a while because inflation is likely to remain subdued, IMF said.
In emerging markets, raising interest rates could happen sooner than in advanced economies, IMF said, also warning that in some countries warding off risks of new asset price bubbles may require greater exchange rate flexibility.
The IMF report did not specifically name China, but on Wednesday director for the IMF’s monetary and capital markets division, Jose Vinals, said there was a risk that the rapid credit growth in China could lead to some excesses and asset price bubbles.
Lesley Wroughton is with Reuters.