Global Growth Outlook
Already a lot of fiscal stimulus has been provided world over. Any more fiscal stimulus raises the issue of debt sustainability especially in major advanced economies. But the slowdown in the global recovery will have an adverse impact on growth in Emerging Market Economies (EMEs), including India.
Due to low levels of capacity utilisation and high unemployment rates, inflation in advanced economies might remain subdued at least in the short term. However, concerns about stagflation in advanced economies remains an issue. On the other hand EMEs are already facing inflationary pressures. Food, energy and metal prices, in particular, have seen significant increases both due to rising domestic capacity utilisation and global commodity price increases.
Growth in India is expected to hover around the targeted 8.5 per cent due to good performance of the agriculture sector, and a range of indicators of industrial production and service sector activity.
Due to food price inflation, rising global commodity prices and demand pressures arising from sustained growth amidst tightening capacity constraints, inflation is still well above the comfort zone of the Reserve Bank. Notwithstanding some moderation, food price inflation has remained persistently high for over a year now, reflecting in part the structural demand-supply mismatches in several commodities. Given the changing consumption patterns and as yet inadequate supply response, food price inflation is expected to head northward. Inflation is expected to moderate from the present level only after some easing of supply constraints and concerted policy action.
In the 2000s, the average headline inflation rate remained in the range of 5.0-5.5 per cent, down from its historical trend rate of about 7.5 per cent. A combination of factors played a role in this. One of these was the commitment on the part of the monetary policy to keep inflation low and stable.
There are many risks associated with the macroeconomic and monetary projections.
1. Prospects of a prolonged slow and halting recovery process in advanced economies. Ongoing fiscal consolidation in the absence of revival of private demand might weigh on the recovery process.
2. A widespread slowdown in global trade will have an impact on the manufacturing and service sectors in India as well despite India’s low exports as a percentage of GDP compared to other major EMEs.
3. The risks to inflation are largely on the upside and despite fragile global recovery, international commodity prices have risen in recent months due to strong demand from EMEs.
4. Japan has resorted to further monetary easing through unsterilised intervention in the forex market. Should there be further quantitative easing by advanced economies, it will pose a further risk to global commodity prices.
5. The surplus liquidity generated in advanced economies could result in resulted in large capital inflows to EMEs. As a result, exchange rates have been appreciating and asset prices have been rising in EMEs. Although India needs capital flows to finance its widening current account deficit but unrestrained capital flows beyond the absorptive capacity of the economy could pose a major challenge for exchange rate and monetary management.
6. The equity market, residential property and gold prices, have gone beyond the pre-crisis peak level. Although the income levels of households and corporate earnings in India have gone up, sustained sharp rise in asset prices in such a short time threatens to widen the already prevalent disparity between the rich and the poor.
(Based upon quarterly review of RBI’s monetary policy)
iSikkim will review the state of Indian economy in the current global context in a 10 part series. This is part three of the series.