There was more than the usual interest in the IMF?s World Economic Outlook report. Because the world?s economic outlook is a cause for some concern now. Well, there?s some good news in it. Growth in advanced countries will slow down more than half, to 1.3%, in 2008?the US accounts for most of this?but growth in emerging markets and India will slow down less dramatically, to 6.7% and 7.9% respectively, a percentage point drop. This is important because emerging and developing markets together account for two-thirds of global growth; China, India, Brazil and Russia contribute almost half of that. The bad news has something to do with the good news: growth in major emerging economies will continue to push up prices of food and fuel. Globally, dollar prices of food items grew by double digits in the last two years. They will shoot up by 18.2% in 2008, making imports a bad price management option. IMF reckons oil price will go up by 34.3% in 2008, more than three times the increase in 2007. So India?s trade and fiscal deficits will go up; fuel is subsidised. Some prices are going up slowly, those of exported manufacturing goods, but that?s bad news for India as well?IMF says price increase in this category was 9.7% in 2007, will be 6.4% this year and 1.4% next year. Prices of exported services won?t be hop skipping and jumping either, according to the Fund?s analysis, and that can?t make India, a major service exporter, happy either.
The main lesson from this, however, is not that controlling inflation in India will have to be primarily a domestic solution. That has been clear for some time, given the trend in global prices. The important issue is, what kind of domestic solution. IMF warns that countries with heavily managed dollar exchange rates have a problem in terms of inflation control because higher interest rates will attract more capital inflows, causing more pressure on rate management. India is an excellent example of this and the problems it causes. India?s central bank doesn?t agree. Nor does it agree that interest rate hikes have done more harm than good over the last year. RBI?s monetary policy stance this fiscal will be known on April 29. Let?s hope for at least status quo.
