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India and the IMF

C. R. L. Narasimhan
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Ahead of the recent IMF-World Bank meetings in Washington, Finance Minister P. Chidambaram questioned the accuracy of growth forecasts of member-countries put out by the world body. In specific focus has been the sharp downgrade by the IMF of India’s growth forecast for 2013-14. In its latest update to the World Economic Outlook (WEO), the IMF estimates the Indian economy to grow by just 3.8 per cent, sharply lower than the 5.6 per cent forecast in July.

A pertinent question raised by Mr. Chidambaram has to do with the rationale, the reasons behind such a sharp downgrade: what is the significant bad news that the IMF has received between July and September to warrant such a steep downgrade?

Many others too have made the point that the IMF’s methodology for calculating national accounts statistics is based on market prices whereas India publishes its estimates on factor cost. The Central Statistics Office (CSO) does give calculations on market prices also but those at factor cost are the usual reference point.

The above point is valid. However, in the instant case, India’s gross domestic product (GDP) growth number, even if expressed at factor cost, will not be significantly better — it will be 4.25 per cent — according to the IMF.

Official statistics from the government of India, the Prime Minister’s Economic Advisory Council (PMEAC) and the Reserve Bank of India expect the economy to grow by between 5 per cent and 5.5 per cent during fiscal 2013-14. Even this modest target seems difficult to achieve, given that in the April-June quarter, the economy grew by just 4.4 per cent, according to the CSO. The government is banking heavily on a revival of the farm sector on the back of good monsoons to push up the growth rates during the second-half of the year.

However, most recent industrial output figures (IIP) for August are far from satisfactory with manufacturing continuing its slump. There is, however, renewed optimism on the current account front with September trade figures showing exports growing for three months in a row.

Mr. Chidambaram is on stronger ground when he questions the value of IMF’s surveillance mechanism, specifically on how it failed to warn member-countries of the possible deleterious consequences of the tapering off of the ultra soft monetary policies of the U.S. and other advanced countries. Mr. Chidambaram’s other point that too frequent downgrades in growth estimates impact negatively on market expectations and spread gloom is valid.

IMF’s downgrade follows similar action by a very large number of private forecasters though, it must be said, very few have gone as low. The IMF’s action should, however, not be viewed in isolation from its other observations on India and even more pertinently the global economy. The IMF’s assessment of the world economy has changed quite drastically over the past few months.

The most important change has come from the way major countries have fared since April. In the post-recession period, the big emerging economies were in the forefront of recovery. Advanced economies were lagging behind. By April this year, however ,the IMF was talking of a “three-speed recovery “with emerging growing rapidly, the Ü.S. and Japan doing reasonably, and Europe still mired in crisis. More recently the IMF chief reversed that view in a speech, acknowledging that in many advanced countries, “we are finally seeing signs of hope,” while momentum is slowing in countries such as India, China and Brazil.

Analysts have unanimously interpreted the above statement to mean that it is no longer possible to identify winners and losers easily. Each individual country is distinct from another but at the same time there is growing inter-dependence. What, however, is clear is that unlike ever before in the post-recession period, advanced economies are in the forefront having put the worst behind them. The U.S. and Japan continue to grow, and the core European economies are also turning in positive growth.

Against this backdrop, IMF’s lower forecast for India has to be explained in more nuanced terms than what the numbers suggest. Europe’s recovery has been marked by surpluses in the current account, which is matched by deterioration elsewhere, especially in India and other developing countries. This, in turn, has created vulnerabilities, as, for instance, the capital flight from India and other countries in the wake of the Fed’s hint of tapering, leading to rapid currency depreciation, inflation and a greater burden of foreign debt.

narasimhan.crl@thehindu.co.in


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