Projecting continuance of subdued global growth, the International Monetary Fund has further lowered its 2013 forecast for India, albeit marginally, to 5.6 per cent from the 5.7 per cent it had predicted in April.
In a World Economic Outlook update issued on Tuesday, the IMF expects global growth to remain subdued at 3.1 per cent, the same level as in 2012, because of appreciably weaker domestic demand and slower growth in several key emerging market economies.
Apart from India, forecasts have been lowered for the other BRICS nations as well – Brazil, Russia, China and South Africa.
For 2014, however, IMF has marginally upped India’s growth outlook to 6.3 per cent from 6.2 per cent projected in April.
Noting that growth has continued to disappoint in major emerging market economies, the report points to infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support.
It cautions about continuing downside risks to global growth prospects, including the possibility of a longer growth slowdown in emerging market economies, given the possibility of slowing credit and tighter financial conditions if the US’s anticipated unwinding of monetary policy stimulus were to lead to sustained capital flow reversals.
The IMF wants the major advanced economies to take additional policy measures to aid stronger global growth. Specifically, it has asked the advanced economies to maintain “a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels”.
The report speaks of increased financial market volatility globally in May and June after a period of calm since last summer.
Emerging market economies, it points out, have generally been hit the hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity have led to some capital outflows, equity price declines, rising local yields, and currency depreciation.
“Many emerging market and developing economies face a trade-off between macroeconomic policies to support weak activity and those to contain capital Outflows,” the IMF says, adding: “Macroprudential and structural reforms can help make this trade-off less stark.”
In advanced economies, longer-term interest rate and financial market volatility has risen, with sovereign spreads in the euro area periphery widening again after a period of sustained declines.
Overall, the IMF says the various corrective measures must be supported by structural reforms across all major economies to lift global growth and support global rebalancing. “As before, this implies measures to sustainably raise consumption (China) and investment (Germany) in surplus economies as well as measures that improve competitiveness in deficit economies,” it notes.