Growth in emerging economies, in the grip of inflation, is also moderating as countries like India and China are called upon to further tighten monetary policy, reduce “still sizeable deficits” in some of them and reduce overheating pressures, and also guard against emerging risks to financial stability.

In laying out the world outlook updated for mid-year, IMF sees a “long and painful” process ahead in advanced economies improving competitiveness and returning to fiscal health, given intractable problems of debt and deficits, in USA and Japan, and euro-zone leaders’ inability thus far to cope with the debt crisis in its periphery with countries like Greece having to make essential fiscal adjustments and effect structural reforms.

Mr John Lipsky, Acting Managing Director of the Fund, has warned that failure to take decisive action could “rapidly spread tensions to the financial system of core economies of the euro area (like Germany, France) and result in a large global spillover”. Financial risks have increased since April, IMF officials say, and policy-makers in advanced economies, especially Europe, have to take tough political decisions with a comprehensive plan to repair the financial system in order to allay worries about “potential contagion”.

New concerns on US economy, which has slowed down since the beginning of the year (at 1.8 per cent in the first quarter of 2011 and more negative signals in the second quarter) have been voiced by the US Federal Reserve Chairman Mr Ben Bernanke. The Fed has lowered its earlier growth projections for US economy for this year and 2012 as some of the present problems could persist into next year. Its revised estimates are 2.7-2.9 per cent in 2011 and 3.1-3.3 per cent in 2012.

Mr Bernanke himself seemed puzzled why the drag is continuing, “We don't have a precise read on why this slower pace of growth is persisting”. Maybe, he said, some of the headwinds like the weakness in the financial sector and problems in the housing sector “may be stronger and more persistent than we thought.' No further boost to the economy has been signalled by the Federal Open Markets Committee which, however, decided at its meeting on June 22 to keep the federal funds rate at 0 to 0.25 per cent ( in force from December 2008) for “an extended period” , keeping in view the weak economic conditions and subdued outlook for inflation over the medium term. Fed would complete its purchases of 600 billion dollars of longer-term Treasury securities (“Quantitative Easing”- QE-2) by the end of June, and maintain its existing policy of reinvesting principal payments from its securities holdings.

Global economic uncertainties have been heightened mainly from trends and developments in USA and EU. The Obama Administration is still locked in negotiations with the Congress Republicans over raising the US debt ceiling and the latter insisting on substantial spending cuts. Republicans are opposed to President Obama’s plan for new taxes as part of a four trillion dollar deficit reduction plan over the next decade so as to safeguard investments in education, green energy and infrastructure.

The Fed shares the Administration fears that further fiscal cutbacks would impede even the slow recovery while failure to take timely action to raise the debt ceiling would have “calamitous” consequences for the highest credit rating US enjoys. With unemployment rate at an unacceptable 9.1 percent in May, President Obama is under immense pressure to create jobs even as his rating on economic management has suffered at a time of his re-run for the Presidency in 2012.

Budget and other domestic compulsions are behind the plan President Obama announced on June 22, to downsize US force in Afghanistan, saying “it is time to focus on nation-building at home”. According to IMF spokesmen, what is missing in USA is a political consensus on tools and targets to bring down debt and deficits as part of a credible medium term adjustment plan with objective endorsed by the Congress. The stalemate over debt ceiling and long-term fiscal path is transmitting concerns to the financial markets.

A prolonged period of low interest rates (as in USA) may lead global investors to under-estimate risks in search of yields, the spokesman pointed out, and it has already spurred capital inflows into some key emerging economies. IMF suggests “orderly de-leveraging” in advanced economies, cutting back the amounts they borrowed, and urges focus in emerging economies on guarding against overheating and buildup of financial imbalances with strong credit growth, rising inflation and surging capital inflows.

Corporates’ increased access to international capital markets could render their balance-sheets vulnerable to external shocks. With strong domestic demand pressures, especially in emerging Asia, macro-economic measures needed to avoid overheating, accumulating financial risks and undermining political credibility. High reserve requirements and in some cases, limited use of controls could play a supportive role in managing capital flows, IMF said.

For USA, IMF has lowered growth estimates to 2.5 and 2.7 per cent for 2011/12 while the world economy is projected to grow 4.5 per cent this period. India’s GDP is retained at 8.2 and 7.8 per cent for the two years as against China’s 9.6 and 9.5 per cent respectively. IMF assumes that global activity, which is uneven, would reaccelerate in the second half of the year though activity would remain unbalanced amid elevated downside risks.

While many emerging and developing economies are already raising policy rates, real rates still remain low, IMF update said. Thus, policy tightening must continue, coordinated with transparent central bank communication to anchor inflation expectations. Economies with high fiscal deficits or debt also need to rebuild room for fiscal policy maneuver, especially those that are susceptible to external shocks or have sharply widening current account deficits.

The FAO-OECD forecast of soaring food prices over the next ten years, further dampens the global economic and social outlook, especially for many emerging and low-income economies, for which the adverse fiscal impact of high fuel and food prices is expected to be sizable. Key solution to tackle price volatility in agricultural markets is to boost investment in agriculture and reinforce rural development in developing countries where 98 per cent of hungry people live and where population is expected to increase by 47 per cent over the next decade, according to OECD.

Already, the IMF’s Fiscal Monitor Report notes spending overruns seem likely in India, based on rapid growth in fuel and food subsidies during the past few quarters. There has been the renewed surge in food and commodity prices this year. Consistent with these trends, projections for the 2012 deficit have been revised upward to 8.5 per cent this year and 8.1 per cent of GDP in 2012. India’s fiscal deficit is projected to fall gradually in the coming years, but will remain high. Its debt ratio will decline moderately, mainly due to rapid output growth. (IPA Service)