The International Monetary Fund (IMF) has lowered its global growth forecast yet again to 4% in 2011 and 2012, much below the 5.1% growth achieved in 2010. As recently as June, the IMF had forecast global growth at 4.3% in 2011 and 4.5% in 2012. The latest projection in its World Economic Outlook (WEO) indicates that GDP in advanced economies will expand at an anaemic pace of about 1.6% in 2011 and 1.9% in 2012. Real GDP growth in major advanced economies ? the US, euro area and Japan ? is seen to rise at a modest rate, from about 0.75% in the first half of 2011 to about 1.5% in 2012.

In emerging and developing economies, capacity constraints, policy tightening and slowing foreign demand are expected to dampen growth from 7.3% in 2010 to 6.4% in 2011 and further to 6.1% in 2012.

However, emerging Asia is forecast to continue to post strong growth of about 8.2% in 2011 and 8% in 2012, propelled mainly by China and India.

In India, growth is forecast to slow from 10.1% in 2010 to 7.8% in 2011 and 7.5% in 2012 while China will slow from 10.3% in 2010 to 9.5% in 2011 and 9% in 2012.

The other two Bric economies will grow at a much slower pace. While growth in Russia would pick up to 4.3% in 2011 and then dip to 4.1% in 2012, it would be down by almost half to 3.8% in 2011 and dip further to 3.6% in Brazil.

Overall, the IMF view is that the global economy is stuck in a dangerous new phase as growth turns weak and uneven. With falling confidence levels, downside risks are rising. While structural problems facing advanced economies have proven even more intractable than expected, the prospects for developing countries have become more uncertain, although growth is expected to remain fairly robust.

Growth in India is expected to be led by private consumption, says the report. Investment is expected to remain sluggish, reflecting, in part, recent corporate governance issues, drag from renewed global uncertainty and less favourable external financing environment. The IMF identifies inflation running close to double digits and has become generalised, as a key challenge for policymakers. It also noted that despite tightening policy, real interest rates are much lower than pre-crisis averages and credit growth is still strong.

The WEO report also identifies India as a country with a noticeably higher inflation along with other developing countries like Argentina, Paraguay, Venezuela and Vietnam. However, it also points out that though credit growth in India has been high as in Brazil, Colombia, Hong Kong SAR, Indonesia, Peru, and Turkey, India has been able to contain the increase in house prices because credit is flowing mainly into infrastructure and industry.

Stressing on the need for further policy rate hikes in Latin America and emerging Asia, the IMF points out that requirements differ across economies. In fact, it suggests that simple Taylor rules, which are based on IMF staff forecasts for inflation in 2013 and output gap estimates for 2011, suggest that G20 economies like India, Russia and Argentina would require larger rate hikes than suggested by GPM estimates.

The report also wants a rollback of fiscal deficits and points out that among G20 economies, the structural deficit is very large in India and appreciable in South Africa. It identifies roll back of deficits in these economies as a major priority not only for alleviating upward pressure on inflation or the real exchange rate (and thus the burden on monetary policy) but also for rebuilding room for fiscal policy maneuvering.

Though fiscal policy priorities are diverse across the region, increasing the pace of fiscal withdrawal is more urgent in economies like India and Vietnam with limited fiscal room and high public debt. Such fiscal savings will also create the room needed for funding infrastructure needs in India, Indonesia and Malaysia, points out the report.