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Bright spot in the Global economy
January 25, 2016, 10:14 am

In its latest update to the World Economic Outlook (WEO) database, the International Monetary Fund (IMF) retained India's growth forecast for the next two years, even as it pared the global estimate citing subdued demand and diminished prospects.

The update released last week expects Indian economy to grow 7.5percent in Fiscal Year (FY)17 and FY18, the fastest among major economies. The IMF has pegged the current year's growth at 7.3 percent, same as last year.

"India and the rest of emerging Asia are generally projected to continue growing at a robust pace," said the update. The global economy is now forecast to grow 3.4 percent in 2016 and 3.6 percent in 2017, a reduction in 0.2 percentage point for both the years from the forecast in October.

Emerging markets are currently going through a rough patch. Brazil is suffering its worst crisis in 80 years, Russia’s economy is contracting close to 5 percent compared to the previous year and China continues to decelerate. China's growth is forecast to slow to 6.3 percent in 2016 and 6.0 percent in 2017, primarily reflecting weaker investment growth as the economy continues to rebalance. China's growth eased to 6.8 percent in the fourth quarter, the weakest since the first quarter of 2009. Only India seems to be able to generate good news.

In the third quarter of this year, real GDP growth in India accelerated from 7.0 percent to 7.4 percent Year on Year (YoY). While exports continued to contribute negatively on growth, the domestic sector remained robust, due to a rebound in investment and private consumption resilience. Private consumption has been growing at an average rate of 6.1 percent annually in the last three years, rising 6.8 percent YoY in the latest quarter. Also, investment went up rapidly in the last three quarters: from 2.4 percent YoY in the last quarter of 2014 to 6.8 percent in the three months ending in October this year.

According to the central bank, the reasons behind the good evolution on investment are low oil prices and better business conditions, facilitated by the boost in public capital spending and cheaper credit. Inflation, historically the key constraint for growth, has improved markedly in the last year, mainly because food prices are stabilizing. Inflation has come down from 8 percent to 5 percent since early 2014, and that has made possible for the central bank to cut rates four times, reducing the lending rate by 60 basis points so far. The ‘twin deficits’ — simultaneous deficits in the current account and fiscal balance — that traditionally burden the Indian economy are also improving. The current account deficit fell in the last two years from about 7 percent to 1 percent of GDP, and the fiscal deficit from 5 percent to 3.4 percent of GDP since the beginning of 2014.

But India’s economic outlook is not without risks. First, growth will not be sustained unless crucial reforms to reduce red tape and boost investment are implemented. The government recently eased restrictions for foreign investors, but two critical measures that will be able to simplify bureaucracy and reduce corruption – the goods and services bill – and free land for industry purposes – the land acquisition bill – are currently stuck in the upper house under amendment processes. Government inaction is a central cause of concern.

The second risk is the price of oil. Low global oil prices have helped significantly to improve inflation and deficits, as the country is a major net oil importer and the government subsidizes gasoline. If prices were to rise, the room for reforms would disappear amid high inflation, higher interest rates, and growing deficits.

"Policymakers in emerging market and developing economies need to press on with structural reforms to alleviate infrastructure bottlenecks, facilitate a dynamic and innovation-friendly business environment, and bolster human capital," said the IMF in its update to the WEO.

Speaking about his assessment of current Indian market, Reserve Bank GovernorRaghuramRajan said, “Things are moving, actions are being taken. I think if we persist in this, and I have no doubt that we will, this will amount to something much bigger. My sense is we are now in something like we were in 2001-02, when we did a lot of work but that didn't show up in the growth numbers. Back then, we were laying the stage, and after that we had ten years of very strong growth. So my hope and expectation is we are doing the same thing now — a lot of little, little reforms that combine together to make a big reform."

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