Challenging environment

https://www.business-standard.com/opinion/editorial/challenging-environment-123072601217_1.html

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Global economy will affect India’s prospects

International Monetary Fund (Photo: Bloomberg)

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Global economic uncertainty has somewhat receded over the past few months, but the outlook for the foreseeable future remains weak. The International Monetary Fund’s (IMF’s) July update of the World Economic Outlook (WEO), released on Tuesday, increased the global growth projection for 2023 by 0.2 percentage points. It also upgraded India’s growth projection for the current year by 0.2 percentage points to 6.1 per cent. However, global growth at 3 per cent for both 2023 and 2024 would be considerably below the historical (2000–2019) annual average of 3.8 per cent. The world economy expanded 3.5 per cent in 2022. In the advanced economies, even as services are now doing well, the manufacturing sector has weakened significantly. This, in part, reflects rotation in demand, which is shifting from goods to services with the normalisation of physical movement after the pandemic-induced disruption.

Despite the below-trend projections, there are still significant risks to global growth. While the inflation rate in advanced economies has moderated, it is still running above the medium-term target. The gradual decline in the core inflation rate suggests attaining the target remains a challenge. As the IMF has noted, the US Federal Reserve and Bank of England are expected to increase policy interest rates more than what was assumed in the April WEO projections. However, it is a relief that the wage-price spiral as anticipated by some economists has not taken hold, particularly in the US, and the longer-term inflation expectations remain well anchored. Given the inflation conditions, nonetheless, interest rates in advanced economies are likely to remain elevated in the foreseeable future, affecting the flow of credit, with implications for growth. Some low- and middle-income countries are also finding it difficult to raise finances.

Even as advanced economies are still grappling with higher inflation, the rate is running well below target in the world’s second-largest economy. The Chinese central bank has cut policy interest rates to push demand. The weakness in the Chinese economy, which is believed to be because of structural factors, can be a drag on the global economy. Although the IMF expects China to grow 5.2 per cent in the ongoing year, analysts anticipate growth to be lower. The global economic weakness is also reflected in the trade forecast. Growth in world trade volumes is expected to decline from 5.2 per cent in 2022 to 2 per cent in 2023. Besides, the Ukraine war continues to pose risks to the global economy. The suspension of the Black Sea Grain Initiative, for instance, has raised concern.

Although the IMF has raised the growth projection for India by a modest 0.2 percentage points for the current year, which is in line with other forecasts, a global economic environment that is weaker than expected will affect prospects. India’s merchandise exports, for instance, declined by 22 per cent, year-on-year, in June. There are also challenges on the domestic front. The government, for example, last week banned non-Basmati rice exports to contain food inflation. Although the move is ill-advised, uncertainty in the farm economy will not allow the Reserve Bank of India to lower the policy rate anytime soon. Besides, at a broader level, India needs to grow significantly above 6 per cent to attain its developmental goals and create employment for its rising workforce. The policy focus thus should firmly be on improving medium-term growth potential in an unsupportive global economic environment.