Sridhar Krishnaswami

"GDP growth in India has slowed modestly but is expected to remain robust with the impact of uneven monsoons and higher oil prices being offset by buoyant industrial activity and strong investment," the IMF said.

Washington , April 13

AFTER averaging about six per cent growth in late 2003 and early 2004, global growth has moderated — accompanied by a significant slowdown in industrial production and global trade — reflecting both a return to a more sustainable pace of expansion and the adverse impact of higher oil prices, The International Monetary Fund has said in its World Economic Outlook (WEO) report ahead of the Spring meetings.

"... this slowdown has begun to bottom out and forward looking indicators appear consistent with solid expansion in 2005 although rising oil prices are an increasing risk," the Fund says going on to make the argument that in spite of the appalling human and physical costs of the December 2004 tsunami that hit several Indian Ocean countries, the impact on growth is expected to be only "modest."

The IMF says that the GDP growth in 2004 exceeded expectations for all regions of the emerging markets and continued growth, "albeit generally slower," is projected for 2005, which will be consistent with global developments. "In emerging Asia, China's economic momentum remains very strong... growth in India also remains quite robust," the WEO noting that strong growth in these countries will support activities elsewhere in the region. That said much continues to depend on extra-regional developments, especially the extent of correction in the information technology markets that contributed to the marked slowdown in growth of Asian economies in 2004, the IMF has maintained.

"GDP growth in India has slowed modestly but is expected to remain robust with the impact of uneven monsoons and higher oil prices being offset by buoyant industrial activity and strong investment," the IMF has said stressing that inflation now seems to be moderating but with the short-term interest rates still very low in real terms and commercial credit growth exceeding 25 per cent, the Reserve Bank of India "will need to continue to monitor the situation closely."

As in the past the IMF has once again cautioned India on the Government deficit saying that fiscal consolidation remains a key challenge and more so because of the "ambitious social agenda" set out in the Common Minimum Programme, which could ultimately raise expenditures by ten per cent of the GDP. "Beyond the medium term risks to macro stability and the constraints the deficit places on a pickup in investment, it may also constrain progress on structural reforms (notably in the financial sector)," the IMF has warned.

The WEO maintains that the recent fiscal responsibility legislation provides a good medium term framework but that this needs to be more fully implemented with the proposed deficit reduction in fiscal year 2005-06 Budget "falling below the minimum annual adjustments the legislation requires."

The IMF has also called for further efforts, which are "essential" to strengthen state government finances, which account for one half of the overall deficit.

For India, the point has been made that while the Budget has proposed only modest structural reform, the strong economic environment provides an important opportunity to improve the business climate. And among the ways this could be done is to address labour market rigidities, agricultural reform, further trade and capital liberalisation and strengthening the financial sector, the Economic Outlook has said.

At a broad and global level, the IMF has made a number of observations including the expansion has become less balanced in that growth has been stronger than expected in the US; buoyant and robust in emerging markets and developing nations but disappointing in Europe and Japan; the global current account balances have widened with the US' current account deficit now estimated at a record 5.7 per cent of the GDP in 2004; the further depreciation of the American dollar; and in the warning that with the oil prices rising nearly $ 6 a barrel above the WEO baseline for 2005, the market remains highly vulnerable to shocks with significant upside risk over the longer term.

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