IMF has revised down its growth projection for the world economy by one percentage point to 4 per cent in 2011 (3 per cent on market-based exchange rates) and in 2012 as well. But, even these lowered estimates are on assumption that Euro area policymakers “contain the debt crisis” in the periphery, U.S. strikes “a judicious balance' between support for the economy and medium-term fiscal consolidation, and that global 'financial market volatility does not escalate”

Current developments in both the major economies are hardly promising of even moderate outcomes, as IMF released its World Economic Outlook, three days ahead of the annual Fund-bank meetings (September 23-24). According to IMF, real GDP in the advanced economies is projected to expand at an anemic pace of about 1.5 percent in 2011 and 2 percent in 2012, helped by a “gradual unwinding of the temporary forces that have held back activity” during much of the second quarter of 2011. USA’s growth would go down to 1.5 per cent from 3 per cent in 2010 and rise modestly to 1.8 per cent next year while euro-area would grow by 1.6 and 1.1 per cent respectively.

India’s growth is again revised down to 7.8 per cent in 2011 from earlier estimate of 8.2 per cent while it would be again somewhat subdued at 7.5 per cent in 2012. Consumer prices are slated to rise by 10.6 per cent this year and 8.6 per cent in 2012. China’s growth, however, would remain at 9.5 and 9.0 per cent for these two years while its CPI would decline from 5.5 per cent in 2011 to 3.3 per cent next year. Still these two are the fastest-growing nations.

In emerging and other developing economies, capacity constraints, policy tightening and slowing foreign demand are expected to dampen growth though financial conditions remain supportive of growth. Bank credit is still strong in most countries, it says. But downside risks for emerging markets are sharp reduction in demand (external), reversal in capital flows and rise in funding costs that could impact the soundness of domestic banking.

In India, the Outlook says, growth is forecast to average 7.5 to 7.75 per cent during 2011–12. “Activity is expected to be led by private consumption. Investment is expected to remain sluggish, reflecting, in part, recent corporate sector governance issues and a drag from the renewed global uncertainty and less favorable external financing environment. A key challenge for policymakers is to bring down inflation, which is running close to double digits and has become generalized. Despite policy tightening, real interest rates are much lower than pre-crisis averages, and credit growth is still strong”.

IMF said increasing the pace of fiscal withdrawal is more urgent in economies with limited fiscal room and high public debt in countries like India and Vietnam, as fiscal savings would also create the room needed for funding infrastructure needs in these economies including Indonesia and Malaysia. Finance Minister Mr Pranab Mukherjee has a series of meetings in USA to seek foreign investments which India seems to urgently need for infrastructure though his visit is being projected in a manner reminiscent of India’s desperate need for foreign aid in the 1950s.

Speaking on the world economy recently, IMF Managing Director Christine Lagarde issued a call to world leaders to act together to address the three main challenges: debt pressures sapping growth, risk of instability in the core of the global economic system, and social tension. To navigate “the narrow path to recovery, we need strong political will across the world―leadership over brinkmanship, cooperation over competition, action over reaction”

Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing, IMF’s update said. It has indirectly backed the recent moves of the Obama Administration - Ms. Lagarde had welcomed the President's Jobs Act sent to Congress (447-billion dollars) while somewhat critical of the euro leaders’ frequently stalling efforts to repair their financial system. IMF favours FED and ECB (European Central Bank) deploying “more unconventional support” in financial market rescue operations.

IMF urged EU policymakers must “swiftly ratify the commitments made at the July summit, and in the meantime, the European Central Bank (ECB) must continue to intervene strongly to maintain orderly conditions in sovereign debt markets. Leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro. By the third week of September, Greece was again in danger of defaulting on its debt posing yet another threat to the stability of the currency union.

On USA, the Fund cautioned that activity, already softening, might suffer further blows—for example, from a political impasse over fiscal consolidation, a weak housing market, rapid increases in household saving rates, or deteriorating financial conditions. Deep political divisions leave the course of U.S. policy highly uncertain. There is a serious risk that hasty fiscal cutbacks will further weaken the outlook without providing the long-term reforms required to reduce debt to more sustainable levels.

There is no end in sight in the housing market for the overhang of excess supply and declining prices. Equity prices have corrected sharply. Given growing downside risks to U.S. activity, the Federal Reserve should stand ready to deploy more unconventional support, and the pace of fiscal consolidation could become more backloaded provided credible medium-term measures are adopted, IMF said. Wall Street was looking for fresh stimulus from the Fed Open market Committee meeting on September 20-21.

But Republicans in Congress arraigned against the President, who is seeking re-election in 2012, are least likely to be persuaded by what most economists in USA or abroad feel it vital for reviving growth and jobs or by what international institutions have urged both in regard to short-term focus on growth and medium-term debt reduction programme.

President Obama’s new deficit reduction plan sent to Congress on September 19 aimed at a three trillion dollar deficit cut over a decade through a balanced package which includes revenues of 1.5 trillion by letting Bush era tax cuts expire in 2013 and closing loopholes in the existing tax code, looked like a non-starter for Republicans determined to resist any tax increase. This would pay for his earlier Jobs Act involving some 447 billion dollars. Mr Obama rejected their criticism of his plan as “class warfare” and said, “it comes down to math”. The President has threatened to veto any bill that makes cuts changing benefits for vulnerable (Medicare etc) but does not rely on raising revenue by making wealthiest Americans or the biggest corporations pay their faire share.. “We are not going to have a one-sided deal”, he said.

In the event of failure of actions, IMF warned,’ commodity prices and global trade and capital flows would likely decline abruptly, dragging down growth in emerging and developing economies with the downside scenario - the euro area and the United States could fall back into recession with activity some 3 percentage points lower in 2012 than envisaged in WEO projections. Damage to other economies would also be significant, it said. (IPA Service)