World Economic Outlook 2015 - Implications for international and national economies

World Economic Outlook 2015 - Implications for international and national economies

Question - World Economic Outlook 2015 was recently released by the IMF. Discuss its implications for international and national economies and compare India’s growth to China.

Implications for International Economies

• WEO/World Economic Outlook 2015 forecasts global growth at 3.5% in 2015 and 3.8% in 2016

• It also projects deeper growth in developed economies as against developing nations

• Growth prospects across economies are uneven

• Lower growth stems from financial and euro zone crisis, weak banks, high debt, raging
population and sluggish advances

• Two major facts with distributional effect are:

- Decline of oil prices
- Exchange rate movements

• Global growth will increase from 1.8% in 2014 to 2.4% this year in advanced economies

• US economy growth will exceed 3% in 2015-2016

• Lower oil prices, moderate fiscal adjustment and monetary policy will support domestic demand

• Growth in euro zone area is showing indications of picking up due to lower oil prices, low interest rates and weak euro

• Japan will experience growth following lower oil prices and weaker Yen

• Growth for emerging economies will fall to 4.3% in 2015 from 4.6% in 2014

• Slow growth for oil exporters like Russia

• Reduced vulnerability and slowdown in investment on China

• Lower commodity prices will weaken Latin American economy; Brazil will be affected through weak sentiments, strict macroeconomic policies and drought

• Growth in low income nations will stay high slowing to 5.5% in 2015 from 6% in 2014

• Risks to outlook for global growth are more balanced; financial and geopolitical risks have
increased

• Sharp dollar falls could trigger financial tensions

• Disruptive asset prices are a concern

• Decisive policies are needed to spur growth; macroeconomic policies in emerging economies should support growth

• Those with fiscal space can adjust public sending to falling oil revenues; depreciation would help those with exchange rate flexibility

Reforms:

- India and South Africa need to remove infrastructure bottlenecks;
- Russia and Indonesia need to improve business conditions,
- BRIC nations must improve employability by education, labour and product market reforms

• Private fixed investments in developing economies has fallen

Implications for National Economy

• IMF’s WEO has forecast India’s growth to rise from 7.2% in 2014 to 7.5% in 2015-2016

• This will overtake China for the first time since 1999

• China’s growth is projected at 6.8%

• There is increasing divergence in growth path of China and India with the latter benefiting

Comparison Between India and China

• China’s CAGR was 10% between 1990 and 2013 while India’s was 9% between 2003-2009

• China’s double digit growth is why it is manufacturing hub

• India needs growth of 7 to 8 percent for job creation to the tune of 12 million each year

• 1/4th of Indian houses have no electricity while China has complete coverage

• India’s literacy level is 74% while China’s is 95%

• India’s demographic dividend does not have an equal in China

• However, its IMR of 43,000 live births is triple that of China

• China’s per capital income at USD 35000 is 3 times India’s level

• At present savings rate of 30% of GDP, India cannot rival China’s growth at 51% savings rate

• Household savings through improvement of employability and financial inclusion are needed to catch up

• China has also invested in human capital and R&D unlike India

• India is vulnerable to uncontrolled industrialisation as much as China

• India must opt for growth plus approach rather than reducing development to a numbers game.

Facts and Stats

• RBI has projected growth in 2015-2016 at 7.8% will be 30 bps faster than 2014-2015’s 7.5%

• WB also said India could attain 8% growth rate in a shift from consumption to investment led growth

• According to IMF’s WEO 2015, GDP growth projections for 2015 are 7.5% for India, 6.8% for China and 3.5% for the world; in 2016, the projections are 7.5%, 6.3% and 3.8% respectively