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Business News/ Politics / Policy/  Outlook for world economy worsens

Tokyo/New Delhi: Painting a grim picture of the world economy, the International Monetary Fund (IMF) said downside risks to a global economic recovery have increased especially since the prospects of a soft landing of the Chinese economy are a tad dimmer and the developed countries are still struggling.

In its World Economic Outlook (WEO) released on Tuesday, the fund, taking a cue from other multilateral institutions and rating agencies, slashed India’s growth projection to 4.9% for 2012 from its earlier projection of 6.2%—the highest margin (1.3 percentage points) of reduction for any country for the year.

In a signal that IMF does not believe the recent measures initiated by the Indian government will bear immediate results, the fund lowered the growth projection for India in 2013 to 6% from 6.6% projected in the July update of WEO.

The IMF projections are not directly comparable with the growth estimates released by the government as they are for the calendar year and calculated on market prices, while the government data is for the April-March fiscal years and calculated on the basis of 2004-05 prices.

“In advanced economies, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased," said Olivier Blanchard, economic counsellor of IMF.

Global output growth is projected to fall to 3.3% in 2012 from 3.5% projected earlier, with the euro area contracting 0.4% during the same year.

The fund said its projections assumed the euro zone will take further measures for greater fiscal integration and that the US will avoid the so-called “fiscal cliff" or the proposed drastic spending cuts and tax hikes that may happen in January. It cautioned that weak progress on both fronts could see further deterioration in global economic prospects.

Cutting the growth projection for China to 7.8% in 2012 from 8% projected earlier, IMF said slowing growth in the country’s economy has affected activity in the rest of Asia. Worse, Blanchard cautioned that once China shifts its production basket from manufacturing goods to services, it “may not be able to sustain the kind of growth rates that even now it is sustaining".

The fund said that in India, where inflation is still high, monetary policy should stay on hold until a sustained decrease in inflation materializes. Wholesale price inflation rose to 7.55% in August against 6.87% a month ago, forcing the Indian central bank to desist from any policy rate cut in its monetary policy review on 17 September.

India’s economy grew 5.5% in the first quarter (April-June) of the current fiscal year ending March, and most private economists have projected the economy to grow around the same rate for the full year (2012-13).

Thomas Helbing, an adviser in IMF’s research department, conceded that the fund had earlier overestimated the resilience of the Indian economy. “For the last few years, the Indian economy had a dream run. It is in the past three years, investments have stalled. In many other ways, in terms of macroeconomic policies, things have not improved. The challenge is to build on the reforms started in the 1990s," he said.

IMF said India’s economic activity suffered from waning business confidence amid slow approvals for new projects, “sluggish structural reforms, policy rate hikes designed to rein in inflation, and flagging external demand".

On Monday, India’s finance minister P. Chidambaram, speaking at the Economic Editors’ Conference, confessed that the Indian economy was “challenged". Without enough economic reforms, the country risks a sharp and continuing slowdown of the economy, “which we cannot afford given the imperative need to generate jobs and incomes for a large population, most of whom are young", he said.

The fund also recognized the recent measures announced by the government to boost investor sentiment and attract higher foreign investment.

That sentiment was echoed by US treasury secretary Timothy Geithner, who is in New Delhi on an official visit to India.

“I think I would make the general observation that just the impact of the sense of initiative and movement and direction; even recognizing that much of the political challenges ahead; just the impact on confidence; that sense of initiative is very powerful and is very helpful," Geithner said.

Still, it will take time for these to have an impact, said an economist. “The measures announced by the government will not impact growth this year. Though the IMF calculates the GDP (gross domestic product) growth from the demand side, what is important to note is the direction," said D.K. Joshi, chief economist at rating agency Crisil Ltd. “The lowering of the forecast by more than 100 basis points indicates that the growth scenario for India has weakened significantly."

A basis point is one-hundredth of a percentage point.

Not everyone agrees with IMF, with at least some economists believing the fund has overstated its case.

Shubhada Rao, chief economist at Yes Bank Ltd, said that though the reasons cited by IMF were valid, the extent of the slowdown will not be as high as that projected.

“There will be a small degree of revival in the investment cycle. The strengthening of the rupee will help reduce imported inflation and control the current account deficit," she said. “Fiscal imbalance will be the only major concern given that the tax revenues are expected to be lower. The government will have to depend on revenues from sale of 2G spectrum and disinvestment." She added, “We expect growth in 2012 to be at 5.4%".

Asit Ranjan Mishra is in Tokyo on the invitation of IMF as a part of its journalism fellowship programme.

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Updated: 09 Oct 2012, 11:58 PM IST
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