India still fastest-growing economy in world gripped by uncertainty: IMF

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IMF-chief

India continues to remain a bright spot amid sluggish global economic forecast of the International Monetary Fund (IMF). According to World Economic outlook (WEO) released by the IMF, India will be the fastest growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global economic growth is facing growing downside risks. The global economy is expected to grow 3.2% in 2016, only marginally ahead of 3.1% in 2015 and down 0.2 percentage point from the 3.4% forecast in January. The April 2016 WEO titled ‘Too slow for too long’ retained India’s growth forecast while lowering global growth projections indicating volatility in financial markets and non-economic risks posed by migration and terrorism are increasing risks of a derailed recovery.

In 2016-17, India’s growth would be higher than China’s by 1.3 percentage points. India has surpassed China since 2014-15, becoming the fastest growing large economy in the world. For 2015-16, India’s growth was pegged at 7.5 per cent, slightly lower than official estimate of 7.6 per cent.

“Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long,” said IMF economic counsellor Maurice Obstfeld in a statement. In a recent speech, IMF Managing Director Christine Lagarde warned that the recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries. “Lower growth means less room for error,” said Mr Obstfeld. “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment,” he added.

Moderate recovery in advanced economies

Growth in advanced economies is projected to remain modest at about 2 percent, according to the WEO. The recovery is hampered by weak demand, partly held down by unresolved crisis legacies, as well as unfavorable demographics and low productivity growth. “In the US, expected growth this year is flat at 2.4 percent, with a modest uptick in 2017,” the report said. Domestic demand will be supported by improving government finances and a stronger housing market that help offset the drag on net exports coming from a strong dollar and weaker manufacturing.

“In the euro area, low investment, high unemployment, and weak balance sheets weigh on growth, which will remain modest at 1.5 percent this year and 1.6 percent next year,” the IMF said in the statement.

In Japan, both growth and inflation are weaker than expected, reflecting in particular a sharp fall in private consumption. Growth is projected to remain at 0.5 percent in 2016 before turning slightly negative to -0.1 percent in 2017, as the scheduled increase in the consumption tax rate goes into effect.

Emerging and developing economies are slowing

While emerging markets and developing economies will still account for the lion’s share of world growth in 2016, prospects across countries remain uneven and generally weaker than over the past two decades. The WEO projects their growth rate to increase only modestly—relative to 2015—to 4.1 percent this year and 4.6 percent next year.

Scope for further structural reforms

More aggressive policy actions to lift demand and supply potential could foster stronger growth in both the short and longer term. The WEO emphasizes a three-pronged approach of mutually reinforcing policy levers. These include (1) structural reforms, (2) fiscal support, with growth-friendly composition of revenue and spending, and fiscal stimulus where there is a need and where fiscal space allows, and (3) monetary policy measures.

The bright spot

According to IMF, India’s growth will continue to be driven by private consumption “which has benefited from lower energy prices and higher real incomes”. In its report, IMF has cautioned India that sustaining growth would require labour reforms as well as reducing infrastructure bottlenecks.


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