The central message of the International Monetary Fund's World Economic Outlook is that 'the worst is yet to come'. India has cause for concern.
The central message of the International Monetary Fund's latest World Economic Outlook (WEO) – it publishes two WEOs each year (in April and October) as well as two updates (January and July) – to policymakers around the world: The worst is yet "to come" for the world economy.
While it does not spell out the dreaded term "stagflation" – a portmanteau describing an economic situation where growth halts (or contracts) even though inflation remains high and stable – the IMF states separately that "one-third of the global economy" contract this year or next year, while the three largest economies—the United States, the European Union and China—will continue to stall" and that "the pressure of rising prices will reduce current and future growth by further reducing real income." The most immediate threat to prosperity remains macroeconomic stability."
Preventing persistently high inflation and growth is probably the toughest policy challenge available. This is because policy measures to control inflation usually bring down growth even further whereas measures taken to promote growth tend to raise inflation. Perhaps that's why the preface to the latest WEO, written by Pierre-Olivier Gourinchas (economic consultant), begins by saying: "As storm clouds gather, policymakers need to keep a steady hand."
As Chart 1 shows, the IMF has sharply cut its global growth forecast – from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. Barring the sharp decline immediately following the 2008 global financial crisis and the Covid pandemic in 2020, this is the weakest growth profile for the world since 2001.
In his official blog, Gourinchas explains both reasons - "the global economy continues to face challenges, the cost crises caused by the Russian invasion of Ukraine, persistent and widespread inflationary pressures, and a recession in China." - and the impact - "Overall, this year's shocks will reopen economic wounds that were only partially healed after the pandemic. In short, the worst is yet to come and, for many, 2023." will feel like a meltdown".
on inflation
Global inflation is now expected to peak at 9.5 percent at the end of 2022 (see Chart 2). It is expected to remain high for longer than previously imagined and is only likely to decrease to 4.1 per cent by 2024.
A particular concern here is the trajectory of core inflation - that is the inflation rate when food and fuel prices are removed. Core inflation generally rises and falls more slowly than inflation in food and fuel.
“Global core inflation, excluding food and energy prices, is expected to be 6.6 percent on a fourth-quarter-quarter basis, reflecting the pass-through of energy prices, supply chain cost pressures and tight labor markets. , especially in advanced economies," the IMF states. In other words, food and fuel price inflation, which has usually driven headline inflation, has now reached headline inflation and, as such, will take longer to go away.
What does this mean for India
At first glance, India is in a better position. India's GDP growth rate is better and inflation is not that high. But these metrics hide that in absolute terms, India is barely out of contraction in 2020, that it was home to the largest number of people (56 million according to the World Bank) living in abject poverty in 2020, or that a million are unemployed.
Also, if the RBI cuts its growth forecast (7.2 per cent) in April, the same as that of the IMF (1.4 percentage points), India's growth in 2022-23 will be 5.8 per cent.
Threats to India come from at least four sources: Higher crude oil and fertilizer prices will drive up domestic inflation; The global recession will hurt exports, drag down domestic growth and worsen the trade deficit; A stronger dollar will put pressure on the rupee's exchange rate, which may result in depletion of our foreign exchange reserves and our ability to import goods when the situation becomes difficult. Also, given the low demand among most Indians, the government may be forced to spend more to provide basic relief in the form of food and fertilizer subsidies. This will worsen the economic condition of the government.
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