Continued fiscal consolidation will be essential to lower macro-economic imbalances

Supported by slightly stronger global growth, improving export competitiveness and implementation of recently approved investment projects, India’s growth is expected to recover from 4.4 per cent in 2013 to 5.4 per cent in 2014, the IMF said on Tuesday.

“India’s growth is expected to recover from 4.4 per cent in 2013 to 5. 4 per cent in 2014, supported by slightly stronger global growth, improving export competitiveness and implementation of recently approved investment projects,” the latest edition of the World Economic Outlook released by the International Monetary Fund (IMF) said.

“A pick-up in exports in recent months and measures to curb gold imports have contributed to lowering the current account deficit.

“Policy measures to bolster capital flows have further helped reduce external vulnerabilities,” the IMF said.

Overall growth is expected to firm up on policies supporting investment and a confidence boost from recent policy actions, but will remain below trend, it added.

“Consumer price inflation is expected to remain an important challenge, but should continue to move onto a downward trajectory,” the IMF report said.

The outlook also projected India’s growth rate to increase to 6.4 per cent in 2015.

In 2012, India’s growth rate stood at 4.7 per cent.

“For India, real GDP growth is projected to strengthen to 5.4 per cent in 2014 and 6.4 per cent in 2015, assuming that government efforts to revive investment growth succeed and export growth strengthens after the recent rupee depreciation,” the report said.

The forecast for China is that growth will remain broadly unchanged at about 7.5 per cent in 2014-15, only a modest decline from 2012-13.

This projection is predicated on the assumption that the authorities gradually rein in rapid credit growth and make progress in implementing their reform blueprint so as to put the economy on a more balanced and sustainable growth path, the report said.

In India, the IMF report said, further tightening of the monetary stance might be needed for a durable reduction in inflation and inflation expectations.

“Continued fiscal consolidation will be essential to lower macroeconomic imbalances,” it said.

Policymakers in India must also concentrate on structural reforms to support investment, which has slowed markedly, the IMF said.

“Priorities include market-based pricing of natural resources to boost investment, addressing delays in the implementation of infrastructure projects, improving policy frameworks in the power and mining sectors, reforming the extensive network of subsidies, and securing passage of the new goods and services tax to underpin medium term fiscal consolidation,” the IMF said.

According to the World Economic Outlook, in addition to tackling near-term vulnerabilities, Asia should also continue to push ahead with structural reforms to enhance medium-term prospects.

Generally, reforms should focus on removing structural impediments to growth in India and across the ASEAN economies through higher public and private investment (particularly in infrastructure).

“In China, reforms that liberalise the financial system and raise the cost of capital will be key to improving the allocation of credit and boosting productivity growth.

“In Japan, structural reforms are needed to achieve a sustainable pick-up in growth and a durable exit from deflation,” it said.

For Asia as a whole, growth is expected to accelerate modestly, from 5. 2 per cent in 2013 to about 5.5 per cent in 2014 and 2015.

The improved outlook in advanced economies, alongside more competitive exchange rates in some cases, will help boost exports, it said, adding that domestic demand will continue to be supported by strong labour markets and still-buoyant credit growth.

Policies are expected to remain accommodative, although in a few cases (India, Indonesia) interest rate hikes on the one hand will attenuate vulnerabilities, but on the other hand could weigh on growth.

In Japan, fiscal consolidation will be a headwind.

Inflation is expected to increase slightly, albeit remaining generally low across the region, as output gaps close, the report said.

“The main exceptions are India and Indonesia, whose high inflation rates should continue to moderate further,” it said.

Global activity to improve further

Buoyed by recovery in advanced economies, including the U.S., the International Monetary Fund (IMF) on Tuesday said global activity strengthened during the second-half of 2013 and is expected to improve further in 2014-15. A major impulse to global growth has come from the U.S., whose economy grew at 3.25 per cent in the second-half of 2013, stronger than expected, IMF said in its latest edition of the World Economic Outlook.

In the stressed euro area economies, however, growth is projected to remain weak and fragile as high debt and financial fragmentation hold back domestic demand, it said.

In Japan, fiscal consolidation in 2014-15 is projected to result in some growth moderation.

Growth in emerging market economies is projected to pick-up only modestly, it said. These economies are adjusting to a more difficult external financial environment in which international investors are more sensitive to policy weakness and vulnerabilities given prospects for better growth and monetary policy normalisation in some advanced economies, the report said

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