India’s economy, which is going through a “broad slowdown”, is projected to grow at 4.4 per cent in fiscal 2012 – further down from IMF estimate of 4.9 per cent – and pick up to 6.5 per cent in 2013, according to OECD which notes FDI and other reforms announced and assumes, for growth projections, their implementation along with requisite spending cuts. Monetary policy has been “hindered” by persistently high inflation and widening fiscal deficit, it said.

Barring China which is projected to grow at 7.5 per cent and recover to 8.5 in 2013 and 8.9 per cent in 2014, with its supportive monetary and fiscal policies, for other emerging economies including India, growth would remain “weak” for some time and gather steam in the coming years. It would be so for Brazil, Indonesia, Russia and South Africa.

OECD Secretary-General Angel Gurria says with the world economy, “far from being out of the woods”, governments, mainly USA and EU must act decisively, “using all tools at their disposal to turn confidence around and boost growth and jobs”. In the United States, provided the “fiscal cliff” is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. Japan is expected to expand by 0.7% in 2013 and 0.8% in 2014.

The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014. The euro-crisis remains a “serious threat” to the world economy and while “adjustment of deep-rooted imbalances across the euro area has begun, much more is needed to ensure long-term sustainability, including structural reform in both deficit and surplus countries” Mr Gurria said.

For OECD area as a whole, GDP growth is projected to match this year’s 1.4% in 2013, before gathering momentum to 2.3% for 2014. Any failure to take decisive actions to end stalemate over fiscal policy in the United States and continuing euro-area instability could plunge the world back into recession, according to OECD. With around 50 million jobless people in OECD area, confidence has to be restored and growth boosted for jobs in USA, Europe and elsewhere. But unemployment would remain high without structural reforms, labour and product, to boost near-term job growth, it said.

Firstly, the US ‘fiscal cliff’ - a combination of tax increases (with the expiry of Bush era tax cuts this year) and mandated Federal spending cuts to take effect from 2013 - could tip an already weak economy into recession, unless a balanced deal is struck between President Obama and Congressional Republicans before end-December. Secondly, the as yet unresolved debt crisis in the 17-nation euro-zone already in recession, poses threat of a major global financial shock and a downturn.

On India, the OECD notes the economy has been growing below trend and business investment is “weak with sentiment having suffered from policy uncertainty”. Recent moves to liberalise foreign direct investment in some sectors, including retail and aviation, have boosted business sentiment somewhat and will promote higher investment and productivity over the medium term.

With tax revenues taking hit by the slowdown while spending has “overshot”, OECD analysis on India calls for spending restraint “to ensure that fiscal slippage is limited and confidence does not suffer further on account of policy uncertainty.” Fiscal deficit (Centre and States combined) is estimated at -8.5, -.8.1 per cent and -7.5 per cent for the three years 2012-14.

In this regard, there is concern over the rising subsidies and likely impact on fiscal deficit. For 20112/13 fiscal year, it says, spending on subsidies is anticipated to “significantly exceed the budget allocation (5.1 per cent of GDP) while tax receipts and revenue from asset sales will fall short owing to economic weakness”. As a result, general government deficit is expected to widen around 8.5 per cent of GDP, it added. However, India’s current account deficit, projected at a little over 3 per cent for next three years, has narrowed over fiscal 2012, due to “softening imports on account of cooling domestic demand and weaker rupee”.

High inflation is another area of concern in the OECD analysis. It estimates consumer price inflation would be 10 per cent in 2012 before moderating to 7.7 and 6.6 per cent over the next two years. WPI is likely to decline from 7.6 per cent in 2012 to 6.7 per cent next year and 6.1 per cent in 2014-15.

On Monetary Policy and inflation outlook, OECD says “stubbornly high inflation has limited room for monetary policy easing”. However, with the modest growth in the economy, spare capacity would mount and this, together with an “assumed stabilization in exchange rate” would create room for easing of monetary policy, hitherto “hindered by persistently high inflation and widening fiscal deficit”.

A downward force on inflationary pressures would also help to ensure that “knock-on” effects of higher regulated diesel prices are limited and inflation slowly moderates into next year and beyond. In this context, OECD cautions that further fiscal slippage would undermine recovery “by limiting the scope for monetary easing and weighing on sentiment”.

Alternatively, if spending can be brought under control and deficit reined in faster, sentiment is likely to strengthen more which would buoy investment and consumption, OECD said. This would also be achieved if other important policy changes, notably further foreign direct investment liberalisation and tax reform were implemented without delay.

As Finance Minister Mr Chidambaram is battling on to contain deficit to below 5.5 per cent of GDP in fiscal 2013 at least, private economists and overseas firms place the likely deficit at close to 6 per cent of GDP. The Finance Minister also expects the economy to register 5.5 per cent growth for the second quarter (July-September), and growth momentum being maintained in the rest of fiscal. CSO will announce the second quarter GDP on November 30.

In the midst of poor data and forebodings, Government can draw some comfort that Moody’s has decided to keep India’s credit status as stable, though the global rating agency has cited lingering concerns over infrastructure, persistent inflation and high fiscal deficit. The government may overshoot the upwardly revised fiscal deficit target (5.3 per cent) due to lower revenue growth and its inability to cut expenses, it said. (IPA Service)