India would beat China to become the world’s fastest-growing major economy in 2016-17, the International Monetary Fund...
India would beat China to become the world’s fastest-growing major economy in 2016-17, the International Monetary Fund (IMF) forecast on Tuesday, as it trimmed growth projections for most major economies, except, in the main, the US, reports fe Bureau in New Delhi. India’s gross domestic product (GDP) is expected to expand 6.3% in 2015-16 and 6.5% in 2016-17 (based on market prices), while China, having experienced its worst economic slowdown in 24 years last year, could witness its growth sliding further to 6.8% in 2015 and 6.3% in 2016 (see table).
The US remained the only bright spot among the advanced economies to have witnessed an upward revision in growth for two straight years — 0.5 percentage point for 2015 and 0.3 percentage point for the year after that — mainly due to domestic demand supported by lower oil prices and persistence of accommodative monetary policy.
The multilateral body has revised down the global growth projections to 3.5% for 2015 and 3.7% for 2016, down 0.3 percentage point in each of the years from its projections firmed up in October 2014. The IMF said though global growth will receive an impetus from benign oil prices, negative factors, including investment weakness attributable to diminished growth expectations in the medium term, would offset this. It called for advanced economies to maintain accommodative policies — through monetary or through other means — to avoid increasing real interest rates.
“In India, the growth forecast is broadly unchanged, as weaker external demand is offset by the boost to the terms of trade from lower oil prices” and a pick-up in industrial and investment activity thanks to policy reforms initiated by the new government, the IMF said. “I think the reform plans of the new Prime Minister (Narendra Modi) are promising. We are going to have to see the speed of the implementation,” said Gian Maria Milesi-Ferretti, deputy director in IMF’s research department.
However, flat growth in gross fixed capital formation in the second quarter as well as low credit growth suggests despite fast-tracking of clearances by the Modi government, most projects are yet to get going. Earlier this month, the World Bank had said India’s growth could touch 6.4% in 2015-16 and 7% in the fiscal after that. In contrast, China could grow 7.1% in 2015 and 7% in 2016, it said and also revised down its June forecast by 0.4 percentage point to project global growth for 2015 at 3%. The World Bank had said risks to the global recovery were “significant and tilted to the downside,” with dangers including a spike in financial volatility, rising geopolitical tensions and prolonged stagnation in the euro zone or Japan.
Apart from “accommodative monetary policy” by advanced economies, the IMF also prescribed structural reforms and fiscal adjustments in many economies. It has also advised nations dependent on oil exports to let fiscal deficits “increase” and draw on from huge funds accumulated over years “to allow for a more gradual adjustment of public spending”. “In oil importers, the saving from the removal of general energy subsidies should be used towards more targeted transfers to lower budget deficits where relevant, and to increase public infrastructure if conditions are right,” it said.
This seems to be apt for India as well, as chief economic adviser Arvind Subramanian said in the recent mid-year report that public investments must “crowd in” private investments, which are hard to come by due to stressed balance sheet of private companies and high debt levels. While finance minister Arun Jaitley has already spoken about rationalising subsidies and non-adversarial tax regime, the economy also needs labour market flexibility, further tax reforms and larger public spending to win its spurs. In order for India to increase its access to the external market for goods and services while global trade growth is minimal and major economies like the US have turned protectionist, it needs to open up its own markets further and make itself an attractive investment destination, primarily by improving governance.
The IMF said while likely thrust on “reducing vulnerabilities from recent rapid credit and investment growth” rather than policy response to “underlying moderation” could keep pressure on China’s economy, Europe will continue to be under strain as weak investments — partly reflecting the impact of weaker growth in emerging market economies — will offset the positive impact of further monetary policy easing and low oil prices. Inflationary expectation in the EU continue to decline, pointing at the persistent weakness in its economy. Global trade volumes, hurt by poor demand for raw materials, could drop by 1.1% in 2015 and 0.2% in 2016, the IMF said.
The growth in Saudi Arabia, the leading oil exporter, could drop by 1.6 percentage points in 2015 from the earlier forecast, thanks to an expected 37.8% drop in oil prices. The Russian economy, already reeling under western sanctions, is forecast to be hit the hardest — the IMF has trimmed forecasts by 3.5 percentage points for 2015 and 2.5 percentage points for 2016.