Bruised world

The April edition of IMF’s World Economic Outlook paints a grim scenario of a world economy laid low by the Russia-Ukraine war. If the pandemic upended the world economy in 2020, with the following year seeing some sort of revival, this year is again proving to be a setback — with a new complication to deal with, namely war-induced inflation. A combination of faltering growth and rising inflation is proving to be a bigger policy challenge than the pandemic-induced one that required cranking up growth by all possible means. As the report says, after having exhausted considerable monetary and fiscal space in boosting growth during the pandemic, both the central banks and governments will have to do a balancing act, given price pressures. Besides, there’s a debt bomb ticking away. This is because, as the IMF report says, “Record debt levels induced by the pandemic leave emerging market and developing economies more vulnerable to interest rate hikes this time around.” The report adds: “A generalised flight to safety as the war continues could put other economies under stress too. More broadly, average spreads had — prior to the war — looked similar to previous tightening cycles, in 2018 and in the 2013 taper tantrum. Since then, spreads have generally increased moderately.” Sri Lanka and Pakistan may not be the only ones exposed to economic upheaval, there are many more low and middle income countries that may land in trouble.

The IMF has reduced its estimates for global growth to 3.6 per cent in 2022 and 2023, 0.8 and 0.2 percentage points lower for 2022 and 2023 than in January. The report pegs inflation at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies — “1.8 and 2.8 percentage points higher than projected in January”. India’s growth projection for 2022 at 8.2 per cent, is down from its January estimate of 9 per cent, owing to the impact of higher global oil prices on consumption, investment and exports. The IMF’s revision comes close on the heels of the Reserve Bank of India’s lowered projections of 7.2 per cent (FY23) from 7.8 per cent and the World Bank’s, from 8.7 per cent to 8 per cent. While India has a diversified production base, its current account deficit, owing to pricey imports, is expected to rise to 3.1 per cent of GDP this calendar year, a figure that is disconcerting when seen against the ‘flight to safety’. While the RBI will have to stick to its tightening course, the onus lies on fiscal policy to strike a balance between fiscal consolidation and meeting committed expenditures.  

The World Trade Organisation has lowered the growth forecast for world trade to 3 per cent from 4.7 per cent (predicted last October) for CY2022. India’s exports success faces a stern test in the wake of a drop in world demand. The challenge is to break into new markets and stick to them. These are trying times to keep investment going, with consumption likely to be subdued in the wake of 7 per cent retail inflation. Mint Street and North Block have their tasks cut out.