In its World Economic Outlook (WEO) released this week, ahead of the Fund-Bank spring meetings, IMF strikes an upbeat note for the world as a whole with a multi-speed recovery - “tepidly in many advanced economies and solidly in most emerging and developing economies“, but not without more risks ahead. Taking an overview, IMF has for 2010 projected global growth at enhanced 4.25 per cent (in terms of purchasing power parity) or 3.2 per cent on market-based exchange rates, the more widely used measurement of the World Bank. Recovery is expected to be the strongest in Asia and weakest in emerging (central and eastern) Europe, IMF records..

Asia is posed to grow by 7 per cent in 2010 and 2011 with strong domestic demand supporting recovery at close to 10 per cent for China in 2010 and 2011 while for India, the estimated growth is flattering at 8.8 and 8.4 per cent for the two years. But these two Asian majors face different sets of problems but with greater responsibility assigned for China in global rebalancing of growth and reduction of the imbalances for which exchange rate appreciation is “essential”, given its role in global market. Greater currency adjustment, IMF said, would “facilitate adjustment in other emerging economies that may fear losing market share if their currencies were to appreciate alone“, a view shared in India as well.

RBI Governor Duvvuri Subbarao has said an undervalued renminbi (Chinese currency)was creating problems. “If China revalues the yuan, it will have a positive impact on our external sector. If some countries manage their exchange rate and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively.” he was quoted as saying.” Brazil and Singapore are among other countries speaking up for renminbi appreciation, days before finance ministers meet in Washington. This was so far more of a US versus China issue..

For India's share of problems referred to by IMF are those relating to inflation and ensuring durable fiscal consolidation by implementing “fiscal and other structural reforms”. Unlike other majors, India has a large public debt and inflation is rising, it is noted.. The 8 per cent plus growth is assumed on the basis of strengthening of consumption and investment being boosted by strong profitability, rising business confidence and favourable financing conditions. (In the IMF data, India stands unique for its high level of public debt among major emerging economies, and, somewhat dubiously, for consumer price inflation estimated at 13.2 per cent in 2010, the highest in developing Asia).

Also, the WEO discussion on world commodity prices including oil provides little comfort for India which is already facing problems on both oil pricing and food fronts. Global recovery prospects and rise in demand from China (oil, metals and other raw materials) and India (oil and food products) are already tending to keep oil prices above 80 dollars a barrel, a sharp rise after last year's downtrend.. Food commodity markets may remain relatively tight and, in the absence of unanticipated increases in supply, the risk is of real food prices moving up, it adds.

Globally, inflation at present is less of a problem though in USA, where it is subdued the Federal Reserve is making credible noises that it would stand ready to use its tools if needed, shifting from the present low interest rate (virtually zero) which remains extended until recovery becomes stronger. Monetary policy tightening in India is taken due note of by IMF and RBI's annual policy statement appropriately highlights the risks, both global and domestic.

RBI's modest upward revision of key policy rates has been endorsed by Government, which is more worried about growth to the extent of downgrading the inflationary pressures., Finance Minister Pranab Mukherjee even asserts that inflation is already weakening and the year would end with 4 per cent and not at what to him is a pessimistic projection of of RBI at 5.5 per cent. On the other hand, RBI is providing for all contingencies to act as necessary to rein in inflationary pressures such as to subserve the growth objective. Mr Mukherjee claims his budget is aimed at controlling inflation at a time when the energised opposition is charging government with “comprehensive failure” on price front. He needs to provide a convincing rebuttal.

IMF Chief Economist Olivier Blanchard has spoken of the “asymmetric nature” of global recovery which creates serious challenges, both for advanced and for developing and emerging market economies. In advanced economies with large deficits and government debts, the main challenges is credible medium-term fiscal consolidation plans to avoid debt explosion..

For emerging and developing countries, the challenges cited by IMF include large capital inflows which they are reattracting with higher growth prospects and higher interest rates. It may be a far cry from maximum domestic resource mobilisation and India now makes no secret of its wanting more foreign investments, especially in infrastructure, to achieve the coveted 10 per cent growth, IMF notes large capital inflows may be welcome news but experience tells that it can also lead to booms and busts. “Thus, the main policy issue facing recipient countries is how to best accommodate these flows, how much to let the currency appreciate, how to use macro-prudential tools, reserves, and capital controls to avoid excesses and maintain stable growth.

IMF is no longer opposed to capital controls and it is among the lessons it has learnt in these crisis years. In dealing with excessive flows which may lead to exchange rate overshooting to undermine competitiveness, it suggests fiscal tightening to ease pressures on exchange rate and possibly some controls on capital inflows or removing controls on outflows.

Broadly, USA is off to better start than Eurozone or Japan, IMF says. From 2009 contractions (-2.4 in US to -.5.2 in Japan), growth in 2010 is estimated at 3.1 for USA, 1 per cent in EU and 1.9 per cent in Japan. Their problem is the huge public debt posing sovereign risks which, if not addressed, could undermine recovery and extend the financial crisis to a new phase. Global financial system is yet to be reformed to prevent another crisis and though bouts of instability have eased, credit markets are not fully back to normal.

IMF has emphasised the urgency of financial regulatory reform (now before US Senate but still to gather momentum in Eurozone). Meanwhile, IMF's Global Financial Stability Report says improving economic and financial market conditions have reduced banks' expected crisis write-downs from 2.8 trillion to 2.3 trillion U.S. dollars and bank capital positions have improved substantially. However, some segments of country banking systems remain poorly capitalized and still face significant downside risks, it said. (IPA Service)