So far, so good

| Updated on January 16, 2018

The IMF has upped India’s growth forecast, but global headwinds pose a risk

It is remarkable that the International Monetary Fund remains sanguine about India’s economic prospects in a gloomy global scenario. India’s macroeconomic fundamentals stand out amidst other emerging economies that, as commodity exporters, have taken a hit on account of falling prices over the last two years. As a commodities importer, India’s twin deficits, both current account and fiscal, have remained in check, while food-driven retail inflation is on the wane, owing to expectations of a record kharif harvest. Not surprisingly, the IMF has upped its 2016-17 growth forecast for India to 7.6 per cent, from 7.4 per cent in July, and expects the same to continue next year. Yet, some creeping factors along with global headwinds could rock India’s boat.

For the first time since 2009, the year following the Lehman meltdown, the value of world trade in goods and services actually fell in 2015, owing to the prolonged stagnation in Europe and the US and the consequent slump in incomes in commodity exporting countries. World growth fell from 5 per cent levels in 2003-06 to 3.1 per cent in 2016. The IMF expects world growth to edge up to 3.4 per cent in 2017 apparently on the basis of an anticipated revival in commodity prices. In keeping with trends in evidence this year, oil prices are expected to rise 18 per cent in 2017. If this happens, India may soon be back to a knife-edge situation in managing its twin deficits. With advanced economies not leading the growth impetus — US growth is expected to increase from 1.6 per cent this year to 2.2 per cent in 2017, while the EU, Japan and Britain are expected to be well below 2 per cent — India’s export demand may not see a major improvement for some time. For India to achieve a growth of about 8 per cent in in a scenario of rising commodity prices, it will have to work on improving export competitiveness and breaking into emerging markets while hoping for an investment revival. All the more reason, then, for the Centre to push ‘ease of doing business’ reforms and spur both infrastructure investment and FDI while the going is good. Amidst a rising political undercurrent against globalisation, India may have to contend with rising entry barriers for goods, services and skilled workers into advanced economies besieged by unemployment. Signals to this effect are already emanating from post-Brexit Britain.

Financial markets too are nervous, even if outwardly calm. Eight years of unconventional monetary policies have arguably cranked up asset markets more than the real economy in advanced economies. Inflows into emerging economies in the pursuit of higher returns have led both to volatility headaches and a debt build-up in these regions. A rate hike by the Fed can ramp up the debt stress among India’s corporates. India finds itself in a sweet spot, but the RBI and the Government need to be prepared for grim possibilities.

Published on October 06, 2016

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor