OECD attributes this to both subdued external and domestic demand and fiscal tightening while stubbornly high inflation and low income growth had softened growth of private consumption. It hopes policy reforms and fast-tracking of projects under way would promote investment recovery though growth over the next two years would be at below pre-crisis rates (5.7 and 6.6 per cent in fiscal 2015).
Return to likely normal weather conditions in 2013 is expected to raise rural incomes, contribute to a decline in inflation and boost private consumption, says the Outlook, which also assumes that external demand is set to improve gradually, increasing exports by around 7 and 9 per cent in these two years. GDP growth could become significant if structural bottlenecks (in energy, transport and land acquisition regulations) were swept away by fundamental structural reforms.
OECD has combined a promising growth scenario with the caveat that failure to implement recently announced structural reforms would “impair growth prospects, reduce competitiveness, exacerbate current account tensions and put fiscal consolidation at risk”. In addition, the large CAD has increased India’s vulnerability to a change in global risk appetite that could reverse capital inflows.The current deficit had widened to about 5 per cent of GDP in 2012 accruing from higher imports, especially of oil and gold, the increase in deficit having to be financed by debt-creating capital inflows.
OECD has welcomed the fiscal consolidation roadmap and fiscal tightening which, it says, should allow monetary policy to be eased further. It has also commended better targeting of household transfers “although further progress is needed”. Urging a cut in high energy subsidies, OECD also calls for reform of the tax system to raise more revenue “in a less distortive way so as to boost private investment and competitiveness” as well as “swift implementation” of the long-awaited Goods and Services Tax.
On fiscal policy, OECD Outlook says the planned reduction in central government’s deficits would involve hikes in administered prices combined with on-going subsidy reform to contain spending pressures while stronger growth should boost tax revenues. The monetary policy, it notes, has recently been eased through cuts in policy interest rate to 7.25 per cent (on May 3) and CRR earlier. Still, liquidity has remained tight and loans to non-agricultural sector have so far failed to rebound.
Further loosening of monetary policy is linked to projected decline in inflation and government sticking to its fiscal consolidation plan. But, OECD points out,the large current account deficit may make it difficult to cut interest rates significantly. In addition, the steady increase in non-performing assets in the banking and corporate sectors may well slow the transmission of monetary policy easing. Also, WPI though declining has remained above RBI’s comfort zone of about 5 per cent. OECD has projected WPI at 6.2 and 5.5 per cent for 2013 and 2014 fiscal years while CPI remains higher at 7.8 and 6.9 per cent respectively.
China, among the emerging economies, has the strongest growth which is likely to be 7.8 per cent as last year and 8.4 per cent in 2014. China’s fiscal stance has appropriately eased moderately ,with public expenditure now rising more rapidly, reflecting both higher social spending and rising government infrastructure spending .The overall current account surplus has also been largely unchanged over the past year, with further gains in export market. China’s current account balance was in surplus at 2.4 per cent of GDP in 2012 and is likely to be 2.3 per cent and 1.4 per cent for the next two years. Capital inflows into emerging markets moderated somewhat in the first quarter of 2013, with the notable exception of China.
Globally, the upturn is also a gradual process and growth likely to improve marginally to 3.1 per cent in 2013 from 3 per cent last year and rise to 4 per cent in 2014. This would be helped by accommodative monetary policies in advanced economies, notably USA and Japan and improving financial conditions. While USA is projected to grow a little faster, the Euro area, already in a second year of recession, remains constrained by the lingering effects of the financial crisis it was overcoming earlier with a series of plans.
OECD has projected growth in advanced economies – US, Japan and Euro area - at 1.9 and 2.8 in 2013 and 2014, Japan 1.6 and 1.4 per cent and euro area at -.0.6 and 1.1 per cent respectively. In the United States, OECD said, the automatic across-the-board budget spending cuts should be made less harmful to growth and a credible long-term fiscal plan needs to be put in place; in Japan, fiscal consolidation should commence in 2014, as planned, and a credible medium-term fiscal plan is necessary to maintain market confidence in the face of challenging debt dynamics; and in the euro area, structural consolidation should proceed at the slower pace planned.
Global trade growth, which slowed down to 2.6 per cent below world output in 2012,, is expected to rise to 3.6 per cent this year and further to 5.8 per cent in 2014. Commodity prices have recently weakened and oil prices as of mid-May were around 9% lower than had been assumed in the end-November 2012. Supply has largely held up so far this year, with reductions in OPEC output offset by improved supply from other sources, such as North America and South Sudan.
Despite continued geopolitical risks, weaker than anticipated demand has thus pushed prices down. These effects are assumed to fade through the projection period, with an assumed moderate upward price movement, of $5 per year in nominal terms. Longer term upward pressures on oil prices that are expected to occur as world demand growth moves back to trend. Overall, non-oil commodity prices are assumed to remain constant at recent levels over the projection period.
A risk shared by OECD and emerging market economies is that the rate of potential growth has become more uncertain since the onset of the global crisis. The output gap in major economies is estimated at -2.8 and -2.4 per cent in 2013 and 2014 respectively (IPA)
OECD LINKS INDIA’S GROWTH RECOVERY TO PROJECT SPEED-UP
MID-2013 OUTLOOK ALSO CAUTIOUS ON GLOBAL PROSPECTS
S. Sethuraman - 2013-05-29 09:54
India’s growth, hesitantly picking up, should gradually recover to 5.7 per cent in fiscal 2014, as efforts to speed up approvals of large investment projects and partial deregulation of FDI take effect, according to OECD’s half-yearly Economic Outlook. Structural factors besides inflationary pressures have impeded growth, which was at its weakest in a decade in 2012, estimated at 3.8 per cent at market prices and on a calendar year basis.