Domestic imperatives

IMF outlook is a warning to complacent policymakers

The October edition of the International Monetary Fund's World Economic Outlook is subtitled "Adjusting to Lower Commodity Prices". A growing number of global economy-watchers are now moving from seeing the steady decline in commodity prices from a blessing to a rather ominous portent for the world economy. Initially taken as a welcome adjustment to a combination of positive factors - the rolling back of liquidity, an increase in supply and so on - the decline in commodity prices is now being viewed as an indicator of sluggish demand. Chinese growth is slowing down, Europe and Japan are experiencing insignificant growth and, most strikingly, the majority of emerging-market economies - which had come out of the 2008 crisis looking relatively resilient - are now in the doldrums, be they commodity exporters or importers. The report highlights the fact that this will be the fifth consecutive year in which emerging markets as an aggregate will have grown at a slower rate than the previous year. The updated growth estimates indicate that the global economy will grow by 3.1 per cent, slower than in 2014 - and, importantly, 0.4 percentage point slower than the IMF's April 2015 forecast. Although a mild recovery is expected in 2016, with the forecast at 3.6 per cent, this is also lower than the corresponding April forecast. Worse, the report assesses risks to these forecasts to be biased towards the downside.

As has been much hyped, India does stand out as something of an outperformer in this rather bleak scenario. India is expected to grow by 7.3 per cent in 2015, the same rate as in 2014, and by 7.5 per cent in 2016. China is projected to grow by 6.8 per cent this year, 0.5 percentage point slower than the last, and decelerate by a further 0.5 percentage point next year. These forecasts suggest that commodity prices will remain soft, not good news for economies like Russia, Brazil and South Africa, all large commodity exporters. They also imply that there is likely to be persistent underutilisation of global capacity, which is not conducive to an investment recovery in any product that is tradeable. As many emerging markets settle into a low growth phase, their currencies will tend to depreciate, bringing another element of competition in a stagnant global trade scenario. The IMF expresses concern about the lack of policy room as far as conventional monetary and fiscal instruments are concerned and emphasises the need for structural, productivity-enhancing reforms.

This message must be taken very seriously by Indian policymakers, who risk being driven into a trap of complacency because India will grow faster than China. Serious, broad-based and deep-penetrating structural reforms are the only way to emulate China's growth performance over the past three decades; a couple of years of growing at a faster rate do not take India anywhere close to that aspiration. The reform agenda is not unknown or obscure; every government since 1991 has, in varying degrees, moved along the same broad trajectory. But, it is all too clear that the two stumbling blocks that governments encounter time and again are complacency and political bottlenecks. The IMF's assessment should be seen as a warning that favourable global conditions will not offset domestic hindrances for some time to come. Clearly, India's economic future is now almost exclusively in India's own hands.