The global economy is slowing down. Policy-makers everywhere face an acute dilemma — to support growth or embark on fiscal austerity. That sums up one of the main points of discussion at the recently-concluded IMF-World Bank meetings at Tokyo. But quite unlike before, the IMF is not advocating a single-point agenda of fiscal consolidation as the only way out for crisis-hit countries. The IMF has been an arbiter of economic policies of individual countries and even globally, a role that had in the past earned it considerable opprobrium for its failure to move away from a single-point agenda of fiscal austerity even when such a course has caused great hardship to the crisis-hit countries, as, for example, during the Asian economic crisis of 1997-98.

This time, the slowdown is widespread, and felt across the globe. It has encompassed the developing ones such as China, and India, too, besides the advanced economies. No longer is it possible for the developing nations to offset the tardy growth in the advanced countries.

According to knowledgeable commentators, the Tokyo meetings signal a subtle but extremely important change in the intellectual stance of the world bodies.

For instance, Christine Lagarde, the head of the IMF, said that countries should not sacrifice growth for the sake of austerity. Especially when the world economy is going downhill, with practically all countries forecast to post lower growth rates during 2012 than what were thought of earlier. Policy-makers everywhere but especially in the advanced economies should ensure that while carrying out the much-needed fiscal correction — meaning reducing the level of debt — they should not lose sight of the other important goal of generating employment.

The latter task entails a fair amount of government spending, and is, therefore, positioned diametrically opposite to the austerity measures that are believed necessary to restore fiscal health. In Greece, Spain and in Italy, the financial markets drove the respective governments to embark on austerity measures, even if some of those were so harsh as to cause social unrest. The belief has been that the markets needed to be convinced of the earnestness of those measures to restore fiscal health. For countries so heavily indebted as those in Europe’s periphery, there was, perhaps, no choice but to heed the messages from bond market yields. What is worse is that the core eurozone countries insisted that these hapless countries tighten their belts further.

The contrary view, espoused with great clarity and conviction by Nobel Laureate Paul Krugman, among others, is, of course, valid. Severe austerity packages that Greece, Spain and a few other countries were compelled to adopt have led to social unrest even as they aggravated the unemployment problem. But eurozone’s policy-makers have been, for most part unwilling or unable to listen.

Slowdown everywhere

The IMF’s World Economic Outlook (WEO) released just ahead of the Tokyo meetings indicated a shift away from the fiscal approach, a point of view which seems to have gathered traction during the actual discussions.

For a start, there is a welcome recognition that in nearly all countries balancing the sometimes competing priorities of growth and debt reduction is the central puzzle facing policy-makers. The global slowdown naturally complicates the picture.

According to the WEO, the world economy will expand 3.3 per cent during this year from its July estimate of 3.5 per cent. Growth in world trade volume will be sharply lower this year. While the forecast for the U.S. has been raised slightly to 2.2 for this year (In July, it was 2 per cent), the IMF expects next year to be not so good. Japan’s recovery has fuelled by reconstruction. While it might grow by 2.2 per cent during 2012, it will sharply decelerate to 1.2 per cent once the reconstruction winds down. China will expand at a lower pace of 7.8 per cent (8 per cent in July).India's growth forecast has taken a massive hit. The revised projection is 4.9 per cent for the current year, down from 4.9 per cent. The other important BRIC country Brazil will grow by just 1.5 per cent as against the IMF’s July forecast of 1.5 per cent. The eurozone countries will witness a flat growth.

The sharp intellectual debate in the international fora resonates well in India. Fiscal consolidation is the big issue here. The government is hard pressed to contain the deficit to within 5.1 per cent of the GDP, which itself is considered to be unacceptably high by fiscal purists. A high-level panel headed by Kelkar has recently submitted a roadmap which involves, among other tough measures, “a frontal attack” on wasteful subsidies.

The Finance Minister has promised to announce a time-bound programme to rein in subsidies but with country wide elections due in two years time — and with important state elections even earlier — it is highly doubtful as to whether such a plan is feasible at all. Meantime, economic growth is slipping. The RBI, among others, feels handicapped in implementing monetary policy because of the absence of support from the fiscal authorities. Inflation is up on the ascendance. The RBI will continue to face its own dilemma-whether to focus on controlling inflation or encourage the flagging growth through possibly lower interest rates.

narasimhan.crl@thehindul.co.in

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