A troubled world: IMF paints a bleak picture

The growth projection for India has been lowered to 6.8 per cent for this fiscal year

The latest World Economic Outlook (WEO) of the International Monetary Fund (IMF) paints a sombre picture of the global economy. According to its estimates, after clocking 6 per cent in 2021, global growth is expected to slow to 3.2 per cent in the current year, and further to 2.7 per cent in 2023. While the slowdown in 2022 was factored in the July update of the WEO, the forecast for 2023 has been revised lower by 0.2 percentage points. If global growth remains in line with the IMF’s projections, it will be significantly below the trend. Global economic growth, for instance, averaged 3.6 per cent between 2000 and 2021. The projections show that the outlook has worsened for 143 economies for 2023, accounting for 92 per cent of global output. The growth projection for India has been lowered sharply by 0.6 percentage points, compared to the July update, to 6.8 per cent for this fiscal year.

The global economy is facing a number of challenges. As the IMF also notes, the Ukraine war, higher global inflation, and a slowdown in China are affecting the global economy. The Ukraine war, which has only intensified in recent days, is not only resulting in loss of life but has also led to economic pain across the world. Gas prices in Europe, for example, have more than quadrupled since 2021. The increase in the cost of living is not temporary because it is highly unlikely that Russian gas will come online anytime soon. Energy costs have gone up in general and the cartel of oil-producing countries is unwilling to let prices come down.

Meanwhile, higher global inflation is forcing central banks to increase interest rates. In the given circumstances, there are risks of both under- and over-tightening of monetary policy. Under-tightening would keep inflation elevated and increase the risk of de-anchoring expectations. Meanwhile, excess tightening would affect output and growth. According to the projections, the global inflation rate will moderate to 4.1 per cent by 2024 from 8.8 per cent in 2022. This means interest rates will remain elevated for quite some time. Higher interest rates and tightening financial conditions would affect capital flows and increase financing problems in emerging markets. A sustained increase in interest rates could also destabilise financial markets with implications for growth.

Global economic conditions will affect the Indian economy, and a sharp correction in the growth forecast by the IMF offers a much-needed reality check. The Reserve Bank of India (RBI), for instance, increased the growth projection for the second half of the year significantly after the numbers for the first quarter came below expectations. Since the global economy is expected to slow further in 2023, expectations need to be adjusted accordingly. It is likely that growth would slip below 6 per cent in the next fiscal year. Thus, in given circumstances, Indian policymakers would do well to first focus on preserving and strengthening macroeconomic stability. Since currency markets are likely to witness volatility for some time, the RBI should use its reserves judiciously. It should also strongly express commitment to contain inflation. The government, meanwhile, needs to demonstrate its resolve to bring down the fiscal deficit effectively. It will have to find policy space to push growth in an unfavourable global environment.