The Hindu Business Line : World Bank sees further slowdown in India’s growth

Observations
Ongoing volatility in global financial markets and decreased risk appetite among global investors are likely to lead to lower capital inflows.
With inflation intensifying, growth slowing and current account deficits worsening in many developing countries, the recent hikes may adversely affect growth and domestic demand more strongly than currently projected.

G. Srinivasan

New Delhi, June 10 The World Bank sees India’s economic growth to distinctly slow further to seven per cent in 2008, following an ‘easing’ in its gross domestic product (GDP) growth to a still strong 8.7 per cent in 2007 from nine per cent in 2006.

In its flagship annual publication Global Development Finance, 2008, released in Cape Town, South Africa on Tuesday, the Bank said beginning this year, inflationary pressures began to build in India with deceleration in industrial production to three per cent in April 2008, indicating “growing signs of a cooling economy”.

In a number of countries such as Bangladesh and India, remittances have risen rapidly in recent years, posting record levels.

But a falloff in growth in countries where migrants are employed, coupled with the sharp depreciation of the dollar, could lead to lower remittance inflows in local currency terms, the Bank said adding that this could lead to weaker consumer demand.

Referring to the prospects in South Asian region, it said high grain, oilseed and energy prices would represent the greatest challenge for regional policy makers to protect the poor, while keeping fiscal positions manageable and preventing second-round inflationary spirals.

Capital inflows

The Bank cautioned that ongoing volatility in global financial markets and decreased risk appetite among global investors are likely to lead to lower capital inflows. “Volatile and declining equity prices in the region, particularly in India - just as ownership of stocks and other financial assets is beginning to take hold among the burgeoning middle-class — could hamper both consumer and business outlays, while depressing overall confidence levels in the economy”, the Bank warned.

It called upon countries particularly active in global interbank markets — Brazil, China, Hungary, India, Kazakhstan, Russia, South Africa, Turkey and Ukraine — to be “concerned about the possibility that their domestic banks would face funding difficulties in international markets, should liquidity pressures in interbank markets remain at elevated levels”.

Taking a broader canvas of the global economy, the Bank said countries that undertake prudent fiscal planning and use monetary policy instruments to effectively maintain price stability would be better placed to sustain growth over the long term, even as developing and high-income countries alike confront the challenge of “balancing short-term and long-term policy goals”.

This year, the Bank said, is shaping up to be a challenging one for development finance with financing conditions facing developing countries having shifted “from benign environment of 2002-06 to the current state of heightened market volatility and tight credit conditions”.

Highlighting the integration of global economy, it said the striking rise in goods and services trade between developing and high-income countries and among developing countries (South-South trade) over the past few years and the spurt in flows of labour and capital across borders implies that “economic and financial links are now stronger than ever”.

These tight links would tend to accentuate the transmission of cyclical fluctuations across countries, in contrast to the conviction that the business cycle in developing countries has become decoupled from that in high-income countries.

But, the Bank hastens to note that improved policies, higher investments and technological progress in developing countries would underpin robust growth over the longer term.

Soaring prices

The Bank said that soaring food and energy prices pose daunting challenges contrasted earlier and current spurt in global crude prices noting that the earlier spikes in oil prices supervened in a context of strong growth, low and stable inflation.

“With inflation intensifying, growth slowing and current account deficits worsening in many developing countries, the recent hikes may adversely affect growth and domestic demand more strongly than currently projected”, the Bank observed.

Hence, it pleaded for enlightened global policy response, urging the donors to augment financing to the UN World Food Programme to help address this emergency in a timely way.

Providing more aid in the form of budgetary support would enable developing countries to extend safety net programmes, such as targeted cash transfers, to the most vulnerable sections and to expand risk management instruments to protect the poor.

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