India's GDP forecast is rosy but roadblocks ahead

The IMF had revised global growth for this year down to 3.3 per cent, a deceleration of 0.4 per cent from its forecast made as recently as April, notes Rahul Jacob

Christine Lagarde, the head of the International Monetary Fund (IMF), looking out at the diminished prospects for the world economy, calls the likely lower growth rates for the foreseeable future "the new mediocre".

Browsing through the IMF's world economic outlook released last week, Ms Lagarde's characterisation seemed, if anything, optimistic.

The IMF had revised global growth for this year down to 3.3 per cent, a deceleration of 0.4 per cent from its forecast made as recently as April.

The assessment of slower growth in different parts of the world by the IMF was stark.

"In the euro area, growth came to a halt in the second quarter, mainly on account of weak investment and exports … in Japan the decline in domestic demand following the increase in the consumption tax was larger than expected.

In Russia and the Commonwealth of Independent States, the weakness reflects the impact of geopolitical tensions on foreign investment, domestic production, and confidence," the IMF report begins before carrying on in much the same vein about lacklustre domestic demand in emerging market economies in Latin America, notably Brazil.

The news of the past few days has reinforced the bearish prognosis.

Germany's exports fell by 5.8 per cent in August, the sharpest drop since the financial crisis in 2008.

An ING economist departed from economist-speak to describe Germany's current doldrums as "a horror story" and said it would require a "miracle" to prevent Europe's largest economy from tipping over into recession.

China's double-digit jump in exports, reported on Monday, on closer inspection turned out to be the kind of statistical anomaly the economy periodically exhibits: the larger reported exports are understood to be largely the result of over-invoicing by Chinese firms to route money from Hong Kong into the mainland to take advantage of the stronger renminbi.

Where China is concerned, the worry is that the property downturn in the country is likely to reduce its growth rate from more than seven per cent to five to six per cent.

In that property-obsessed nation, property transactions and prices dropped about 10 per cent in the first half of the year, according to Moody's.

The ratings agency worries that a "steep downturn" in the property sector in China could "derail the global recovery".

What this all adds up to is a global outlook that - but for soft commodity prices, partly a function of slower growth in China and infighting among the oil-producing countries - is more worrying than it has been since the financial crisis in 2008.

It is, in fact, largely a result of the global financial crisis that we have a situation where the large developed economies have interest rates at levels of about 0.5 per cent while public debt levels have grown dramatically.

Think of 2008 as a kind of nervous breakdown for the global economy, especially in the developed world.

Since then, the advanced economies, as the Financial Times' Martin Wolf grimly noted last week, have been in a "state of managed depression".

In what might be called a world in perpetual need of Prozac, "aggressive monetary policies … sufficient to halt accelerating deflation (have been) insufficient to produce a strong expansion", writes Mr Wolf.

As the IMF outlook reaffirms, all this extended era of near zero interest rates appears to have achieved in the long-term - aside from much needed stability in the aftermath of 2008 - is the likelihood of "secular stagnation" in advanced economies.

By contrast, the Fund's Outlook is optimistic about India's prospects - along with the United States, we are one of the few economies for which it forecasts steadily climbing gross domestic product (GDP) growth rates - from 4.7 per cent in 2012 to 6.4 per cent in 2015.

Given the worrying prospects for the rest of the world, it is hard to see how we can buck the trend to such an extent.

This is borne out by India's September export numbers, showing an increase of just 2.7 per cent, a deceleration from the 6.5 per cent growth between April and September. Gaurav Kapur of RBS was quoted in Mint last month, underlining that monthly exports between November 2010 and August 2014 averaged $25.5 billion.

In September, India clocked $29 billion in exports. This is in spite of a steep depreciation by the rupee over the past few years.

This is what the "new mediocre" likely means in the context of the developing world - or at least where India's mediocre export competitiveness is concerned.

While all eyes have been on the prospects for recovery in the United States, the euro zone and Japan, in a recent blog, Sweta Saxena, an IMF economist, explains that emerging markets have been slowing from an average growth rate of about seven per cent between 2003 and 2008 to six per cent since then to about five per cent between 2014 and 2018.

"Despite an uneven recovery, growth in advanced economies is projected to eventually recover.

Not so for emerging markets," Ms Saxena writes.

"More worrisome is the medium term outlook, where projections have been revised down serially since 2010.

In the past, we expected growth to bounce back (and it did). This time seems different." What this suggests is that focusing on improving India's ease of doing business ratings is a start, but India will need major reforms in improving the skills of our workforce and its productivity and transforming our circa 19th century ports and railways so that they become efficient linkages to the global economy of 2014.

The IMF's predictions for India's near-term growth may seem rosy, but the usual caveats apply - that is, we are apt to under-perform.

As the same report highlights, India is among the countries where the "serial" downward revisions of GDP growth forecasts in the past few years has been most pronounced.