India is not yet a ‘major driver’ of global growth, the US Department of Treasury said in its semi-annual ‘Report to Congress on International Economic and Exchange Rate Policies’, but added that in the midst of weaker outlook across emerging market economies, Indian economy’s recovery has strengthened ‘under a new reform agenda’. Top 10 points of note:
1. India’s recovery has strengthened under a new reform agenda; since it is not a large importer, however, it is not yet a major driver of global growth.
2. India is now the eighth country from the top in terms of foreign reserve. Buoyed by savings of $44 billion from drop in prices of oil imports, India’s total foreign exchange reserve has reached an all-time monthly average high of $328 billion. India’s foreign exchange reserves reached an all-time high in June 2015 as the central bank purchased foreign currency to moderate appreciation pressures from foreign investment inflows on the rupee, particularly in the first quarter of the year.
3. Weaker outlook is evident across emerging market economies, which exerts a growing influence over global economic prospects. The slowdown in domestic Chinese investment and Chinese demand for imported commodities and components is having wide-ranging implications for other economies.
4. While Brazil is entering its second year of recession and will not be a source of growth in Latin America, Russia is struggling due to economic mismanagement, lower oil prices, and the impact of economic sanctions.
5. Sharp drop in the price of oil is having a large impact on global current account imbalances. On an annualised basis, the roughly $50 per barrel decline in the price of oil is generating shifting income of over $600 billion annually from oil exporters to oil importers, holding all else constant, with Europe and Asia the key beneficiaries.
6. Asia benefits the most from a lower oil price. Asia’s gain in the first half of the year was nearly $340 billion in savings from oil imports. China’s savings amounted to nearly $120 billion – the largest single country to gain from lower oil prices. Japan saved $76 billion, India $44 billion, and Korea $36 billion.
7. In many cases, this shift is boosting already very large current account surpluses: Germany’s surplus is projected to rise to 8.5 percent of GDP this year, or around $ 335 billion; Korea’s surplus is on track to be around eight percent of GDP; and Taiwan’s surplus is well over 10 percent of GDP. Though significantly lower than its 10 percent of GDP peak in 2007, China’s current account surplus in the first half of 2015 topped three percent of GDP and the full year surplus is likely to reach USD 350 billion.
8. These growing surpluses have added to national incomes in parts of Asia and Europe, but demand growth in Europe remains too sluggish and has weakened in Asia.
9. What these economies with large current account surpluses should do is that rather than absorb demand from the rest of the world, they should take supplemental policy actions, including fiscal actions, to provide added support to domestic demand and give impetus to global rebalancing.
10. Because of drop in oil prices, the United States’ oil import bill was nearly $110 billion lower in the first half of the year. Euro area economies saved nearly $142 billion.