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Bleak outlook: New government may need to reassess fiscal conservatism

The IMF is projecting 2019 as a delicate year for the global economy

  • Published 15.04.19, 9:25 AM
  • Updated 15.04.19, 9:25 AM
  • 2 mins read
The IMF expects growth in India to rise to 7.3 per cent in 2019 and 7.5 per cent in 2020 from a fairly modest 7.1 per cent in 2018 (iStock)

A little over a year ago, everything seemed to be going swimmingly well for the world economy. Trade tensions had, of course, erupted largely because the American president, Donald Trump, had started aggressively pushing his campaign to make America great again — setting the stage for a bruising battle with China which had worked up a massive trade surplus with the United States of America. Even so, the International Monetary Fund had projected a growth rate of 3.9 per cent in 2018 and 2019 as it believed economic activity was accelerating across almost all the regions of the world. But in its latest report of the biannual World Economic Outlook — which comes out in April and October — the IMF has forecast a slowdown across 70 per cent of the global economy in 2019. Global growth is projected to slide to 3.3 per cent in 2019, which signals a swoon from the peak rate of 4 per cent in 2017.

The IMF is projecting 2019 as “a delicate year for the global economy”. The downside risks emanating from an outbreak in trade wars, further twists and turns in the Brexit farce, and the heightened probability of another risk-off episode in some countries (when investors dump high-risk instruments and prefer to move into the safe haven of cash and low-risk bonds) could scupper the anticipated bounce back to 3.6 per cent growth rate in 2020. If none of these risks erupt, then a pickup in global growth is expected in the second half of the year buoyed by accommodative monetary policies in the US and other advanced economies.

The IMF expects growth in India to rise to 7.3 per cent in 2019 and 7.5 per cent in 2020 from a fairly modest 7.1 per cent in 2018. However, these growth forecasts have been trimmed by 0.1 percentage point for 2019 and 0.2 percentage points for 2020 from the projections made last October. The IMF numbers are not too far off from the Reserve Bank of India’s forecast, which has been a little more conservative, by projecting a growth rate of 7.2 per cent in 2019-20 and 7.4 per cent in 2020-21. The IMF forecasts for India pertain to the fiscal year (April-March) and so the comparisons are germane. The IMF believes that more central banks may need to adopt accommodative policies and governments may have to devise fiscal stimulus measures to prop up faltering economies. Until now, the RBI and the Narendra Modi government have refused to budge from their positions of monetary and fiscal conservatism. When a new government is in place, it may need to reassess those positions.

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