Mumbai: While everybody is falling head-over-heels over the International Monetary Fund (IMF) World Economic Outlook (WEO), April 2023 titled ‘A Rocky Recovery forecast that predicts Indian economy set to grow at 5.9 percent in 2023 and 6.3 percent in 2024, what many tend to overlook is that the same report also predicts that the Consumer Price inflation will hover in the range of 4.0 percent to 4.9 percent, that too between 2023 to 2028.
For the ruling Bharatiya Janata Party (BJP) that is heading for crucial Assembly elections this year and the Lok Sabha elections in 2024, the IMF forecast on inflation is a worrying sign.
The IMF in its report argues that the “tentative signs in early 2023 that the world economy could achieve a soft landing – with inflation coming down and growth steady – have receded amid stubbornly high inflation and recent financial sector turmoil.”
The IMF report pins the blame of stubbornly high inflation on the war in Ukraine that could intensify and lead to more food and energy price spikes, pushing inflation up. It further argues that underlying (crore) inflation is likely to decline more slowly in 2023, and return to target is unlikely before 2025.
As per the IMF latest forecast, the global growth will bottom out at 2.8 percent this year, before rising moderately to 3.0 percent in 2024. “Global inflation will decrease, although more slowly than initially anticipated, from 8.7 percent in 2022 to 7.0 percent this year and 4.9 percent in 2024”, says the report.
The Indian economy is expected to grow at 5.9 percent this year, while the Chinese economy is expected to grow at 5.2 percent. However, while the Indian economy is expected to grow at 6.3 percent in 2024, the Chinese economy is projected to grow at 4.5 percent.
As per the IMF report, the Real Gross Domestic Product (GDP) growth for India which is sub-categorised as ‘Emerging and Developing Asia’ under ‘Emerging Market and Developing Economies’ group of countries, the Real GDP growth rate currently in 2023 will be 5.9 percent, in 2024 it will be 6.3 percent and 6.0 percent in 2028.
One thing that China watchers in India could take note of from the IMF report is that it projects a 5.2 percent Real GDP growth for China in 2023, while India’s Real GDP is set to grow at 5.9 percent this year.
The Real GDP growth for China thereafter is set to decline to 4.5 percent in 2024 and further decline to 3.4 percent in 2028.
As against this the Real GDP growth for India is projected at 6.3 percent in 2024 and 6.0 percent in 2028.
In the case of Consumer Price which was projected to be at 4.9 percent, is projected to be at 4.5 percent, in 2024 it is projected to be in the range of 4.3 percent to 4.4 percent, whereas in 2028, the Consumer Prices inflation is projected to be at 4.0 percent.
Comparatively, in China, the Consumer Price based inflation which is projected to be at 2.3 percent in 2023, will rise to 3.2 percent at the end of the period. However, the Consumer Prices which are projected to be at 2.2 percent in 2024, is expected to decline further to 1.3 percent by the end of the period in 2024.
Already, for Ramesh Shetty, a small-time shopkeeper in Goregaon, four bananas are costing Rs 30. He says for a daily wage worker this is too much. “What will the poor labourer eat and save, if the prices of their essential staple diet items like potatoes, onions and bananas are going to go through the roof. These unseasonal rains have made matters worse as vegetable prices and fruits like mangoes have skyrocketed”, remarks Ramesh Shetty.
According to the IMF report is the Current Account Balance (CAB) (the country’s financial inflow and outflow) which is projected to be in the range of minus 2.2 percent for 2023-2024 and minus 2.5 percent in 2028 in terms of GDP. Much of the CAB depends on the Foreign Direct Investment (FDI), remittances by Indians living abroad and outflows in terms of loan repayments.
On the CAB issue, what favours China is that it has a trade surplus with the US and that is why it has a positive Current Account Balance. The CAB projections for China for 2023 is pegged at plus 1.4 percent, will slightly dip to plus 1.1 percent in 2024 and further decrease to plus 0.4 percent in 2028.
What is significant to note for India when it comes to growth in China, is that the IMF report terms it as ‘Faltering growth in China’. “With a substantial share of the economy’s exports absorbed by China, a weaker-than-expected recovery in China would have significant cross-border effects, especially for commodity exporters and tourism-dependent economies. Risks to the outlook include the ongoing weakness in the Chinese real estate market, which could pose a larger-than-expected drag on growth and potentially lead to financial stability risks”, says the IMF report.
The IMF attributes the weak economic recovery in China to the surge in Covid-19 infections which the IMF says was partly due to the SARS-CoV-2 variants making their way back to China. “The surge in infections compounded the headwinds from property market stresses in China”, remarks the IMF in its report.
Another disturbing note in the IMF report is that the war in Ukraine could trigger a renewed energy crisis in Europe and exacerbate food insecurity in low-income countries. The report argues that the Ukraine war will further lead to splitting of the world economy into geopolitical blocks.
It argues that this fragmentation further hampers multilateral cooperation. Barriers to trade are steadily increasing. The report points to countries resorting to export bans on food and fertilizers in response to commodity price spikes, restrictions on trade in microchips and semiconductors, and green investments aimed at preventing technology transfer.
It further adds that while some countries may benefit from an associated rearrangement in global production, the overall impact on economic well-being would likely be negative.
Another, fallout of this fragmentation, rearrangement points to the increased fragmentation of Foreign Direct Investment (FDI), as geopolitical tensions and inward-looking policies have gained importance. “The flow of strategic FDI to Asian countries started to decline in 2019 and has recovered only mildly in recent quarters… Asia became less relevant both as a source and host (for FDI), losing market share vis-à-vis almost all other regions.
In its most significant observation regarding FDI, the IMF report says, “Moreover, since 2018, coincident with increasing trade tensions between China and the US, geopolitical factors have become more relevant to FDI flows. Finally, the analysis suggests that these factors matter more in regard to investments in strategic sectors.”
The IMF in its report further argues that some of the large emerging market economies such as Brazil, China and India are particularly vulnerable to fragmentation in the FDI, than advanced economies. In short, the report suggests that FDI could be used as a tool by advanced economies to pull-over non-aligned block countries to their block using it as a tool to reward or punish the country refusing to toe their line.