IMF pares India’s growth to 6.1 percent

July 16th, 2012 - 8:37 pm ICT by IANS  

Washington, July 16 (IANS) With global recovery weakening further, the International Monetary Fund (IMF) has marginally reduced India’s growth projections from 6.8 percent to 6.1 percent for 2012 and from 7.2 percent to 6.5 percent in 2013.

In the past three months, the global recovery, which was not strong to start with, has shown signs of further weakness, the 188-nation global financial monitor said Monday releasing three July updates on global financial health.

Financial market and sovereign stress in the euro area periphery have ratcheted up, close to end-2011 levels. Growth in a number of major emerging market economies, notably Brazil, China and India, has been lower than forecast, IMF’s World Economic Outlook said.

“This partly reflects a weaker external environment, but domestic demand has also decelerated sharply in response to capacity constraints and policy tightening over the past year,” it said.

However, these developments will only result in a minor setback to the global outlook, with global growth at 3.5 percent in 2012 and 3.9 percent in 2013, marginally lower than in the April 2012.

But this would be so provided there is sufficient policy action to allow financial conditions in the euro area periphery to ease gradually and that recent policy easing in emerging market (EM)economies will gain traction, it said.

The July update of the Global Financial Stability Report (GFSR) also noted that emerging markets are facing extraordinary uncertainty about external conditions impinging on their economic performance.

Earlier this year, policymakers across several EM economies were still worried about large-scale capital inflows and excessive appreciation of their currencies, the GFSR said.

Such fears have given way to concerns about overly rapid depreciation and increased volatility, as currencies like the Brazilian real or the Indian rupee depreciated by between 15 and 25 percent in less than one quarter, the report said.

Equity markets in EMs rebounded strongly during the first two months of 2012, but have since reversed much of these gains, it said.

Market participants are also concerned about slowing domestic growth, which could erode bank profitability and pose some risks to financial stability, for instance in Brazil, China and India, the report said.

India is a rising concern, with the rupee recently weakening to new record lows, as the need to finance large fiscal and current account deficits is pressuring markets, though financial restrictions have facilitated the financing of the fiscal deficit.

For policymakers, the current constellation of conditions poses significant challenges, the report said, noting in a few large emerging economies (India, Russia, Turkey), fiscal space is being rebuilt more slowly than is desirable.

The focus of the regulatory reform agenda has shifted from development of standards to rulemaking and implementation. A few G-20 countries (India, Japan, Saudi Arabia) have already announced final rules for implementation of Basel III from early 2013, but the majority are still in the drafting or consulting stage.

The July Fiscal Monitor update noted that in India, overall deficits for 2012-13 were revised upward to almost 9 percent of GDP, more than 0.50 percentage points higher than in the April 2012 Fiscal Monitor, mainly due to higher fuel subsidies and revenue shortfalls.

A determined reduction in costly subsidies would be a strong signal of a credible fiscal turnaround, IMF said. It would also allow relaxation of financial restrictions, spurring private investment and growth.

(Arun Kumar can be contacted at arun.kumar@ians.in)

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