Despite the developing countries growing slower in 2012, the lowest in average in a decade, GEP notes, their growth are still at higher rates as a group and with increased imports (like India) have become “the motor for global growth”. The World Bank has lowered global growth to 2.3 percent in 2012 (or 3 percent in PPP) but expects it to improve to 2.4 percent in 2013 and 3.1 and 3.3 percent in 2014 and 2015.

For China, the Bank estimates growth at 7.9 percent in 2012 to rise to 8.4 percent in 2013 and stabilise at 8 percent in 2014-15. As an engine for global growth and its significant weight in world economy, any abrupt fall in China’s high investment rates could slow growth globally. But perhaps more than any other country, China has the instruments to achieve a gradual rebalancing of its fast growing economy, which is bottoming out of a slowdown.

Though the Bank has based all its growth and other forecasts on assumptions of the more serious left-over fiscal concerns in USA, after the “cliff” deal, being resolved in the Congress over the next two months, it cautions that uncertainty continues on the future path of fiscal policy with the added risk of economic disruption posed for all countries if the debt-ceiling is not raised from the present level of 16.4 trillion dollars.

In Washington, President Obama has bluntly told Republicans in Congress that he would not negotiate with them over the federal debt ceiling, which has been almost touched by the end of 2012, and their failure to raise the limit would trigger a new recession and a credit downgrade (as in 2011 by one rating agency) for the world’s largest economy. Republicans have wanted to use debt-ceiling negotiations as lever to push for more spending cuts especially in regard to social security and Medicare payments.

As his first term ends – and he enters the second four years with inauguration on January 21 – President Obama told a news conference that the American people won’t tolerate the economy being held hostage by Republicans to force “disastrous cuts” to programmes the middle class depend on while protecting the wealthy. “Congress needs to do its job.”

The GEP has upgraded the immediate risk of a protracted fiscal impasse in the United States over the EU sovereign credit crisis, though both remain major external risks for the global economy and even more so, for developing regions. The Bank says developing countries must emphasize internal productivity-enhancing policies, and as persisting headwinds from high-income countries hopefully become less intense, it should allow for a slow acceleration in their growth over the next several years.

The World Bank’s assessment of India’s fiscal and monetary policies, inflation and reforms under way and its own prescriptions are relevant in the context of the ongoing exercises in the Finance Ministry for the Union Budget for 2013-14. At factor cost, the growth projection for fiscal 2013 is 5.4 percent (5.1 percent on fiscal year basis), “the weakest in nearly a decade”, according to the Bank. (WB says factor cost growth rates customarily reported in India have tended to be higher than market price GDP growth rates).

For 2013-14, the Bank has projected 6.4 percent and 7.1 percent for the following year at factor cost as against 6.1 and 6.8 percent in fiscal year terms. It assumes a stronger rebound in the coming year or two, held back by the difficult global economic conditions. GEP takes note of policy measures since September last including FDI liberalisations, increase in diesel price, cap on LPG cylinders, and the setting up of Cabinet Committee to fast-track clearances for infrastructure projects.

While the spurt of reforms “temporarily restored investor confidence and led to an increase in equity inflows” it said several others still remain pending like land acquisition, insurance, pensions, mining, and direct taxes, that require parliamentary approval. Investment growth has been “relatively weak” and the fuel subsidy burden and fiscal deficit remain high.

According to the Bank, India needs to attract substantial foreign investment inflows to finance a larger current account deficit, projected at -4.5 percent of GDP in fiscal 2012, -3.8 percent in fiscal 2014 and -3 percent in the year after. Also, given the weak global recovery, it would be essential to maintain sound macroeconomic policies, sustain efforts at fiscal consolidation over the medium-term, deepen structural reforms, and improve the investment climate for the private sector.

Persistently high inflation, mainly due to “loose fiscal policies in the past, have prevented monetary policy easing”, the Bank says. While keeping policy rate at 8 percent, the central bank has used other instruments to improve liquidity and ease monetary conditions. Large fiscal deficits and persistently high inflation in South Asian countries have limited the scope for policy easing or demand stimulus measures to support growth. Falling international reserves and high current account deficits may also constrain monetary policy in countries like India and South Africa, the Bank said.

The high food price is ascribed to partly rising incomes and tight supplies but mainly to result from structural constraints and bottlenecks in food productions, storage and logistics. Along with inflation, he bank cites fiscal deficit as a major issue. It points out at over 9 percent the general government deficit is significantly higher than the average deficit of economies in G-20.

While the target for Centre’s is now set at 5.3 percent of GDP, the Bank says, the deficit could overshoot the target if growth remains weak, tax and non-tax revenues do not materialise to the extent expected, or if spending pressures remain strong. The Bank calls for “a more forceful attack on fuel subsidies” which, even after successive measures, still account for the bulk of the overall subsidy burden, as well as a move towards pricing mechanisms that better reflect the level and variability of input costs Also, efforts would be needed to broaden the tax base to bring deficits under control.

The Bank, however, expects a rise in private capital flows to South Asia in 2013 by 20 per cent to 87 billion dollars in 2013 as regional growth picks up. Extended low interest rates in high-income countries and abundant liquidity in global financial markets will buoy capital flows to South Asia during the forecast horizon. Foreign direct investment is expected to increase in 2013 to $37 billion, while net portfolio equity flows are forecast to rise further to around $16 billion.

As issues relating to holdups in mining activity in India are resolved, investment flows are expected to recover in this sector as well. Even with a modest pick-up of growth in 2013, India’s growth will remain relatively high by global standards, and thus the country is likely to remain an attractive destination for international investors looking to longer-term returns.

Developing countries also face homegrown challenges. China has to manage the transition from today‘s extremely high investment rates to levels more compatible with long-term growth. But for the majority of developing countries, supply-side rather than demand-management policies are key to assuring stronger growth. (IPA Service)