IMF has projected a grim scenario of the region's growth plummeting to 1.3 per cent in 2009 and making a weak recovery in 2010, subject to a rebound in global economy.

Recession in developed economies will not lift this year while growth revival would be weak in 2010 with continuing peak levels of unemployment, according to current official forecasts in USA and EU. There is a note of warning for emerging economies of Asia in the IMF report which says weak external demand and tighter financial conditions could lead to a surge in corporate distress, with possible defaults on obligations. Also, export-led growth strategy may no longer pay the same dividends as in the past as IMF foresees a structural decline in demand from advanced economies.

Apart from the WTO estimate of a 9 per cent decline in world trade this year, foreign direct investment flows which saw a reduction by 18 per cent last year would further slowdown in 2009. Unctad Survey of TNCs shows that healthy flows of FDI are likely to resume only in 2011. With the tightening of trade and external financing channels, countries like India have a greater need to look at diversification of sources of growth.

For India, IMF notes, growth would slow markedly in 2009 to 4.5 per cent before starting a rebound by year end. While global demand weakening would not affect India as much as other countries, because of its low dependence on exports, financial shock would have an adverse impact as strong investment growth in recent years owed much to favourable credit conditions, the report points out. Investment growth is thus expected to be severely curtailed and so GDP growth. Depending on global conditions, IMF projects a 5.6 per cent growth in 2010.

Rebalancing of growth in emerging economies and other developing countries away from exports to domestic demand is now being increasingly advocated by USA, as it appraises its own painful experiences from free play of market forces. International financial institutions led by IMF as well as regional development banks like ADB are also calling on developing countries to focus more on domestic demand.

IMF sees a structural decline in demand from advanced economies in coming years and says rebalancing strategies are needed for emerging economies to get back to pre-crisis growth rates. In developed economies, especially USA, the era of easy credit to finance purchases of consumer durables could well be over. Accordingly growth rates for Asian manufacturing and exports could be structurally low for many years, IMF report adds.

China is trying to catalyse private consumption which had fallen for a decade relative to its GDP. Many Asian countries, IMF says, could find scope to promote greater domestic consumption, particularly by building stronger social protection systems that would reduce the need for precautionary savings (as has been happening in China) to meet necessities related to health, education and retirement.

IMF has again called for forceful counter-cyclical policies in Asian countries for the region to come out of the recession quickly and vigorously. It would be necessary to sustain fiscal stimulus injected for 2009 into next year. On the monetary side, IMF says central banks having nearly exhausted policy rate reductions to low levels, may need to try and reduce risk premium and unlock credit markets by extending their balance sheets as done in some advanced economies (Japan, Korea). Credit support to private sector could also be extended through purchase of long-term instruments including corporate bonds. Guarantees to bank lending in support to small businesses could sustain credit flows to this sector.

The emerging post-poll scenario will throw up enormous challenges for India's polity and economy. While major issues of national concern were not clearly focussed in the poll campaign by leading contenders, voters would have been guided by what matters most to the common people like prices, especially foodgrains and other food articles which make a mockery of the wholesale price index-based inflation at below 1 per cent, and lack of basic infrastructure and social services.

Issues of national and regional security have also pushed themselves to the top of the political agenda for the new government which would have first to decide on the immediate steps required on the economic front to mitigate the negative impact from the global crisis. These will include both fiscal and monetary measures to sustain growth even at moderate levels. The focus will have to be on domestic demand-led growth.

With private capital flows drying up, multilateral financial institutions are assuming the central role in helping countries to ride out the global storm. Following the G-20 Summit in London, IMF and World Bank have announced their new lending programmes in flexible ways. While its lendable resources are being augmented to 750 billion dollars, IMF has already approved three arrangements under its Flexible Credit Line - Mexico 47 billion dollars, Poland 20.5 billion and Colombia 10.4 billion dollars. The Fund has significantly modernised its conditionality for lending programmes.

The World Bank has announced it would extend 45 billion dollars for infrastructure programmes in developing countries over the next three years. Its annual lending is being stepped up to 35 billion to reach a total of 100 billion over three years. All the financial institutions are also expanding their capital base, the IMF with its quota review advanced to January 2011, the World Bank will draw up its plans later this year while the Asian Development Bank has successfully got its capital trebled to 165 billion dollars.

ADB President Mr. Haruhiko Kuroda told the annual meeting in Bali (May 4) that the “transformative” increase in the Bank's capital would place it on a strong footing to provide financing for counter-cyclical programmes for the developing member-countries to overcome the negative impact of the global crisis and enlarge its traditional programmes of support for economic and social infrastructure, social safety nets and develop innovative ways of financing for poverty reduction.

Out of its total commitments of around 11 billion in 2008, India's share was 2.8 billion followed by China 1.77 billion dollars. ADB is to supplement its lending with 10 billion dollars over the next two years inclusive of one billion dollars as trade financing. (IPA Service)