Indian Policy Makers Must Keep In Mind The Global Economic Scenario

According to the latest projections, global growth will weaken to 2.8 per cent in 2023 from 3.4 per cent in 2022. 

The April estimate is 0.1 per cent lower than the January figure. IMF has also revised its growth projections for India.

It now estimates that India’s growth rate in the current financial year will be 5.9 percent, which is 0.2 percent less than the estimate given in January. 

It has also reduced the estimate for 2024-25 by 0.5 percent to 6.3 percent.

The growth forecast of the IMF is much lower than the latest estimates of the Reserve Bank of India. 

The Reserve Bank has predicted a growth of 6.5 per cent in the current financial year. 

Some private sector economists estimate that the growth rate for the current year may be much lower than the IMF’s estimate of 5.9 per cent.

Although the IMF estimates that India’s growth rate will improve during the next financial year, it may still remain weak in the medium term as global economic conditions remain unfavourable. 

According to IMF estimates, the global economy is not expected to regain the pre-pandemic growth rate.

If we look till 2028, the IMF has projected the global growth to be three percent. This is the weakest medium-term forecast since 1990. 

Earlier in the period between 2000 to 2009 and 2010 to 2019, the global economy grew at the rate of 3.9 per cent and 3.7 per cent annually respectively.

Moreover, not only is the baseline growth estimate low, but there are several risks associated with it. 

For example, as stated in the World Economic Outlook, there is a 25 per cent chance that global growth could fall below two per cent in 2023.

It is worth noting that the UK’s economic advisory firm Oxford Economics issued a note terming the IMF’s projections as optimistic, arguing that it limitedly estimated the impact of the tightening of financial conditions in developed countries.

There are several factors that could affect growth in the medium term. 

For example, the IMF’s baseline estimates assume that financial sector problems have been contained.

For the time being, it may seem that the problems in the banking sector have been brought under control, but a sharp increase in interest rates after easy availability of money could lead to more problems in developed markets. 

This will further tighten the financial conditions and affect the growth rate.

Although central banks have raised interest rates sharply to combat inflation and inflation is expected to come down in 2023, it may still take some time for prices to stabilise. 

High government and private debt with high interest rates which can prove to be a burden.

In addition, the geo-economic divide of recent years, driven in part by US-China rivalry and the invasion of Ukraine, will also weigh on global potential and growth projections.

Talking about the increase in the size of global trade, it is estimated to decline by 2.4 percent in 2023, while it declined by 5.1 percent in 2022.

In such a situation, it is important for Indian policy makers to make economic interventions keeping in mind the global economic scenario. 

This means that they will have to work harder not only to create policy space but also to move towards higher economic growth in the medium term.

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