Though India’s growth has faltered because of a decline in savings and investment rates, Rakesh Mohan, India’s executive director at the IMF, told Raj Kumar Ray that the country has the capacity to come out of the low growth era. While FII inflows have been on the rise in recent months, the former RBI deputy governor warned that India must remain vigilant as unwinding of easy money policy in the US could result in a significant reversal in capital flows.
Last year, the IMF chief spoke of a three-stage recovery in advanced and developing nations. Has there been a change in the global growth patterns? Will there be a change in the forecast for India's growth in 2014?
Compared to IMF's forecasts a year ago, the US recovery has been somewhat faster. Some countries in the European Union have also begun to show signs of recovery. Some EMEs such as China and India have indeed slowed. IMF will come up with its World Economic Outlook in April with its latest forecasts.
IMF seems to have a different view on the Indian economy.
I don't think IMF's assessment is very different from what the government view is, except that IMF's growth estimates are slightly lower. India’s growth slowdown has been caused by both global and domestic developments.
The global slowdown after the North Atlantic Financial Crisis (NAFC) has affected almost every country's growth rate, including major EMEs such as China, Russia and Brazil. Growth in global trade fell significantly after the NAFC. So there is no doubt that the global slowdown has affected everyone.
In India, we were able to counter the NAFC by coordinated fiscal and monetary policy loosening during FY09 and FY10, which helped in maintaining a healthy GDP growth until FY12. It was only from FY13 that growth has been impacted significantly.
The finance minister has also said that stimulus measures were higher than necessary, and the need for the second and the third fiscal packages is debatable. I agree with him. With the increase in fiscal deficit as a consequence of the fiscal stimulus adopted soon after the Lehman crisis government borrowing increased on a relatively sustained basis since then and crowded out private investment. It also impacted inflation. With the high inflation (CPI inflation averaged around 10% in last four years) that we have experienced, nominal interest rates have had to be high correspondingly.
That has impacted private