The uncertainty in times of the global recession has certainly not curbed the appetite for forecasts in the IMF. The public information notice circulated after the formal Article IV consultations of the IMF executive board with India last week, unlike in the past, has not only projected trends in the major economic indicators for 2008-09 but also for 2009-10 at a detailed level?-perhaps to ensure more clarity and instil greater confidence. Though it points to a further deceleration of growth by a percentage point to 5.3% in 2009-10, it goes a step ahead to point out that non-agriculture growth will be still higher at 5.9%, a reassuring pace considering the contraction in output in many important economies. And it also speaks about the upside risks that stem from a higher than anticipated impact of the stimulus packages already implemented.

The reasons for optimism are many. But the most important is the limited impact of the slowdown on the savings and investment levels. The IMF projects that though the savings rate will take a hit with the ratio of domestic saving to GDP moving down by 1.4 percentage points to 34.6% of the GDP in 2008-09, it will marginally pick up to 34.9% in 2009-10. Thus domestic savings will only fall by 1.1% of the GDP in the next fiscal year from its peak levels in 2007-08. It further points out that the impact of the fall in domestic savings on investment levels in the current fiscal year will be initially contained by the doubling of the current account deficit to 3% in the current fiscal year.

Consequently the gross investments will even move up, albeit marginally, by a decimal point to an all time high of 37.6% of the GDP in 2008-09, despite the sharp dip in the overall growth rate. However, the investment rate in the economy will decline by 1.2 percentage points to 36.4% of the GDP in 2009-10, despite the marginal pick up in domestic savings, mainly due to the slowdown in net foreign investment flows. But even this is not bad?the economy mustered a peak growth rate of 9.6% in 2006-07 with an investment rate of just 35.9%.

However, the foreign investment scenario is also not so bleak. Though net portfolio investment is expected to be negative for the second consecutive year, the outflows will be stemmed with the numbers decelerating from $11.7 billion in 2008-09 to just $2.5 billion in 2009-10. Far more reassuring are the trends in foreign direct investments with the quantum of net inflows only decelerating from a peak level of $ 19.9 billion in 2008-09 to $14 billion in 2009-10, not bad for an economy that was struggling to garner $4 billion some years ago.

The other good news is that inflation levels will be firmly contained. While wholesale price increases are expected to drop from a high of 8.8% in 2008-09 to just 1.9% in 2009-10 the consumer price increases are expected to decelerate to less than half their level; from 7.8% in 2008-09 to 3.4% in 2009-10.

The bad news hits both the domestic and external sectors, with the worst tidings from the latter. The main reason for this is the IMF projections which show that the merchandise trade scenario is bleak with a slowdown in export growth, from 28.9% in 2007-08 to 12.2% in 2008-09, further gathering pace and even shrinking exports by as much as 9.4% in 2009-10. This would certainly have a significant negative impact on employment and overall growth in the next fiscal year. However, the faster fall in merchandise imports will bring down the trade deficit to some extent.

The lower trade deficit and the substantial reduction in portfolio outflows will also help stem the erosion of foreign exchange reserves. Total reserves which are expected to fall from $309.7 billion in end March 2008 to $246.8 billion in end March 2009 will remain at $243.5 billion by the end of March 2010.

Though the IMF does not make any projections about nominal exchange rates, the stability in the foreign exchange reserve levels would hopefully stem the rapid depreciation of the rupee in the next financial year. But one reason for caution is the sharp increase in short term debt to close to 8% in 2009-10, which is more than double the levels from four years ago.

?p.raghavan@expressindia.com