👍👍👍Navigating a crisis | The Financial Express

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As IMF’s global outlook turns dimmer, India must reinforce the focus on stability

The Indian economy has presumably slipped into a somewhat long period of lower growth. Its potential growth has fallen. (IE)

If the International Monetary Fund (IMF) had to forewarn about another bout of financial instability, nearly 15 years after Lehman Brothers filed for bankruptcy, and make a fervent call that geo-economic fragmentation of the word must be avoided “at all costs,” what it reveals as much as the depth and intractability of the world economic crisis is the limitations of institutionalised multilateral counsel in a crisis-ridden world. The world body sounds ominous, if not helpless, when it almost acknowledges that a systemic financial crisis looms large, and asks the regulators and governments to ensure that the recent financial tremors “do not morph into a full-blown financial crisis.”

In the latest edition of the World Economic Outlook, the IMF merely states the obvious as it says that, “over the medium term, the prospects for growth now seem dimmer than in decades,” and that, “the road back to price stability could be long.” While revising its baseline forecast for the global growth in 2023 to 2.8%, a full 1 percentage points lower than predicted in January, 2022, it also says that the “advanced economies” would grow at just 1.3% in 2023, less than half the rate in 2022. Prospects for the “emerging market and developed economies” are on an average stronger, but even their combined growth is now seen to be just 3.9% this year, significantly lower than 4.7% forecast in January, 2022.

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All this is definitely bad news for the Indian economy. India’s status, as “one of the bright spots” of the increasingly sullen world economy, is principally due to its strong macro-economic fundamentals, rather than its aggressive preparedness to take the lead in the world economic stage. That said, the conductors of the country’s monetary and fiscal policies have done a commendable job, despite counsels to play to the gallery. There is indeed a case for resource redistribution in the economy, to lift the poor and let the large informal sector win their spurs during the policy-induced, potentially wholesome transition to a largely organised economy, but that doesn’t justify fiscal extravagance.

The Indian economy has presumably slipped into a somewhat long period of lower growth. Its potential growth has fallen. The pace of structural changes is steady, but rather slow and inadequate to recapture the lost growth potential in the medium term. In fact, the slowness of the structural rejig itself is partly due to the policy focus on inclusiveness, which by itself is no less desirable an objective, than a few basis points of additional growth that rapid, ruthless reforms could produce. The IMF’s latest India growth outlook—down 20 bps and 50 bps, respectively, for the current fiscal year and the next from a quarter ago—perhaps shows that it’s now better understood the country’s economic dynamics, and ground realities.

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But the agency has a history of going wide off the mark, in its India-related forecasts, tending to err on the side of optimism. India’s statistical gaps and a certain degree of data opacity could be the reasons for this, apart from the Fund’s own proclivity to see oases in the largely arid global economic landscape. The IMF’s advices are not only well-taken, but only reinforce the direction India has been taking in its own volition. India’s policymakers must take note of the IMF’s caution that further tightening of global financial conditions could lead to a surprise increase in the country’s sovereign spread.