The global economy is in the midst of its worst crisis in many decades with many developed economies on the brink of financial meltdown and imminent recession. The optimists predict that India will be able to sustain its 8% growth even in this context. That seems unlikely. The World Economic Outlook (WEO) brought out by IMF suggests that India?s GDP growth will slow down to 7.9% in 2008 and further down to 6.9% in 2009. The report serves adequate notice to the government on the growing downside risks and the urgent need to take proactive measures to face the global slowdown. Of particular relevance to India are the projections on global trade and export prices that would affect overall demand in the economy and also on the current account balances and consumer prices.
Of the various trends forecasted the most crucial are the IMF estimates on the international trade in goods and services. The WEO numbers show that global trade in merchandise goods and services, which has been steadily growing over the last three years to touch a peak level of 21.2% in dollar terms in 2008 will decelerate sharply to 4.2% in 2009. Though trade in both goods and services would be affected the brunt of the fall will be borne by the merchandize segment where global exports will decelerate from the decadal high of 22.6% in 2008 to 4.2% in 2009. The slowdown is services trade will be a tad lower with export growth dipping from 15.7% to 3.9%.
The reduction in growth of merchandize exports to less than a fifth of current levels can be of serious consequence to Indian exporters who have seen flows pick up by around a quarter in the first five months of the current fiscal year. It will also impact the overall demand and especially that of manufactured goods which account for almost two-thirds of Indian exports.
This is especially so because of the anticipated sharp fall in dollar prices of internationally trade manufactured goods. According to the IMF estimates prices of manufactured exports, which has steadily climbed up from 3.6% in 2005 to a projected peak level of 13.8% in 2008 will slump to just 0.5% in 2008. It should be noted that India?s exports fell by 1.6% in 2001-02, the last time the global prices of manufactured exports fell sharply.
With domestic demand falling sharply, as reflected in the sagging Index of Industrial Production figures, even a marginal fall in exports volumes will be sharply noticed.
Adding to burden of the international export slowdown will be the high oil import bill. According to the IMF, oil prices will only dip marginally by 6.3% to $100.5 in 2009. Though global prices of primary commodities like food and metals are also expected to dip, by 5.8% and 8.4% respectively, Indian domestic consumers would not gain substantially due to the falling rupee whose value has depreciated more than 19% in the current calendar year.
However, what is comforting is that despite these twin reversals in the global exports of goods and services India?s overall external scenario will still remain outside the danger zone. This is because though India?s current account deficit that is expected to double to 2.8% of the GDP in 2008 it will only increase marginally 3.1% in 2009.
Though one would expect that this gap could be easily funded by the non-debt creating inflows, especially if current trends in FDI flows are maintained, the IMF seems to have some reservations about this. In fact, according to the IMF, India would have to draw upon its foreign exchange reserves to fund the growing deficits causing the total foreign exchange reserves to fall from $ 254 billion in 2008 to $ 244 billion in 2009, for the first time in the current decade.
The implication of this anticipated fall in capital flows would be especially severe for the rupee exchange rate, as any further substantial depreciation of the rupee will stymie efforts to control inflation. This is not very comforting especially since the IMF forecasts show that Indian consumer prices will fall only marginally from 7.9% in 2008 to 6.7% in 2009, which is almost a percentage point higher than the 5.8% average estimated for the whole of emerging Asia.
?p.raghavan@expressindia.com