New Delhi: The International Monetary Fund (IMF) said in a Monday update to its World Economic Outlook released in April that the dream run of emerging markets such as India is coming to an end, acknowledging a trend that analysts and experts around the world have been speaking of for some time.
IMF scaled down its estimate of global growth in 2012 by 0.1 percentage point, or 10 basis points (bps), to 3.5%. It also revised the projection for India’s growth in calendar 2012 to 6.1% from 6.8%.
Growth is expected to fall, while inflation remains high. Are there any silver linings left for India? Mint’s Anil Padmanabhan tells us.
Meanwhile, data released by the Indian government showed inflation had moderated in June, although food inflation remains high, making the task of the Reserve Bank of India (RBI) more difficult.
IMF said that even the 3.5% growth estimate for the global economy is subject to the euro area enforcing fiscal and banking union, and emerging markets able to persist with interest rate easing.
It’s going to be a tough year for emerging economies, it warned. “In emerging market economies, policymakers should be ready to cope with trade declines and high volatility of capital flows,” IMF said.
That and inflation data are the variables RBI will need to factor into its monetary policy review on 31 July. With the annual monsoon rains being deficient by around 21% in the period up to 16 July, there is already an expectation that the prices of at least some crops, such as coarse cereals, oilseeds and pulses—all of which have seen a sharp contraction in sowing this year—will rise.
The deficient rains have exacerbated the problems before India, which faces not just the fallout of a slowing euro zone, but is roiled by its own internal issues, ranging from a swelling fiscal deficit to a poor investment climate. IMF blamed a weaker external environment as well as decelerating domestic demand while revising its estimate for India’s growth in 2012. It expects India to grow 6.5% in calendar year 2013, again 70 bps down from its April forecast. IMF said it expects the global economy to expand 3.9% in 2013, 20 bps lower than its April estimate.
The Indian economy grew at 5.3% in the fourth quarter (January-March) of 2011-12, its lowest pace in nine years. Planning Commission deputy chairman Montek Singh Ahluwalia said earlier this month that he expects the economy to grow 6.5-7% in the current fiscal year ending 31 March. While India follows the April-March fiscal year popular in this part of the world, IMF follows the calendar year.
Specifically terming India a “rising concern”, IMF said the rupee had depreciated to record lows even as the need to finance large fiscal and current account deficits was putting more pressure on the financial and currency markets. The rupee has depreciated about 19% against the dollar in the past 12 months.
Still, there is a point of view that the worst is over for India.
Abheek Barua, chief economist at HDFC Bank Ltd, said the concerns expressed by IMF are a reflection of what happened in the past. “These are known factors and they are not getting any worse,” he said.
Barua said he expects a small pickup in growth momentum in the second half and it could end up averaging 6.4-6.5% in the current fiscal year.
Separately, data released by the industry department on Monday showed provisional headline inflation rate, as measured by the Wholesale Price Index, slowed to 7.25% in June from 7.55% in the previous month. However, with the monsoon already playing truant, an increase in inflationary expectations may stoke a rise in food prices.
The inflation data holds significance ahead of the quarterly monetary policy review by the central bank, and at a time when investment and industrial activity have weakened significantly. Despite pressure to the contrary, RBI is expected to hold firm given little policy support from the government to contain its own fiscal imbalance.
RBI governor D. Subbarao said on Monday that the inflation threshold for India is 5% and that it’s clearly above this level. He added that growth being hurt due to high interest rates is a short-term concern. “Sacrifice in growth is only in the short term. In the medium term, relationship between growth and inflation is non-linear. Below the threshold, maybe, you can exploit the trade-off; above the threshold, higher inflation actually leads to loss of growth.”
IMF said in its report that in emerging economies such as India, China and Brazil, “expanding credit significantly at the current juncture would heighten asset quality concerns and potentially undermine GDP (gross domestic product) growth and financial stability in the years ahead”.
India’s factory output grew 0.8% in the first two months of the fiscal year (April-May), while exports contracted 1.7% in the first quarter (April-June), further confirming the broad-based slowdown in the economy.
Without naming India, IMF said that in economies where inflation and credit pressures have not eased significantly, “targeted measures could be considered should bank liquidity or funding pressures arise in the context of the current unsettled global financial environment”.
RBI has cut the cash reserve ratio (CRR), or the proportion of money banks have to keep with it, in two rounds by 125 bps since January, injecting about Rs 80,000 crore into the banking system. It cut its policy rate by 50 bps in April after raising its key lending rate 13 times between March 2010 and October 2011, to fight persistently high inflation. Even after a half-percentage-point cut in the repo rate, only HDFC Bank has lowered its minimum lending rate by 20 bps to 9.8%.
The repurchase, or repo rate, is the rate at which RBI injects liquidity into the system.
During the customary meeting with the central bank on 9 July ahead of the policy review, bankers demanded a 25 bps rate cut and a cut in CRR to ease liquidity, citing falling demand for loans and its impact on their profitability.
In its June mid-quarter monetary policy review, RBI kept key rates unchanged despite widespread expectations of a cut, blaming rising inflationary pressures.
Delayed sowing in the kharif (summer) crop, such as paddy and coarse grains, will affect agricultural output. Data released on Friday by the agriculture ministry showed the area under sowing till 13 July had contracted nearly one-fifth from last year.
The government is ready with a contingency plan to deal with a drought, agriculture minister Sharad Pawar said in New Delhi. The country won’t ban exports of rice and wheat as it has ample stockpiles, he added.
“We have not come to (a) level where we can apprehend a drought,” he said. “We will wait up to second week of August.”
Much of India is rain-fed and a delayed sowing could often mean no sowing at all. Food inflation accelerated to 10.81% in June from 10.74% in May, mostly because of the higher prices of vegetables, fish and eggs. The June inflation data may be revised in keeping with the past trend. The April inflation rate has been revised upwards to 7.5% from the provisional figure of 7.23%.
The poor monsoon looms large over the Indian economy.
The outlook is already grim for the coming week, with the monsoon slowly shifting to the Himalayas and the north-eastern states. Experts say the window for sowing crops will close within the week.
Water in 84 of India’s key reservoirs was at just 60% of last year’s levels and 80% of the 10-year average.
Aditi Nayar, a senior economist at credit rater Icra Ltd, said sowing of various oilseeds and pulses currently remain below trend on account of the sub-par coverage and magnitude of the monsoon rainfall, which may result in a further rise in prices. “Overall, a hardening of inflationary expectations on the back of double-digit food inflation for the last four months remains a concern,” she said.
Citigroup India said in a report released on Monday that it expects RBI to hold on to policy rates in its forthcoming review while the bank held on to its projection of a 50-75 bps rate cut in the second half (October-March) of the current fiscal year.
Anup Roy in Mumbai and Bloomberg contributed to this story.