labels: economy - general
IMF bullish on global growth; raises Indian growth estimate to 8.3 per cent news
14 September 2006

The IMF has revised upwards its April 2006 forecast on global growth by 0.25 per cent. The multilateral agency now says global economic growth will be higher than previously thought 5.1 per cent in 2006 and 4.9 per cent in 2007.

However, IMF also warns of the global imbalances, caused by China''s growing record global trading surpluses ($18.8 billion for August 2006) and the US trade deficit ($64 billion), in a report released ahead of the IMF and World Bank''s annual meeting in Singapore.

Highlights of the reports:

  • Surpluses in oil producing nations to remain high
  • European economies to continue recovery, barring Germany, where growth will slow as a result of an increase in VAT to 19 per cent
  • US growth would slow from 3.4 per cent to 2.9 per cent
  • One-in-six chance of fall in growth to 3.25 per cent in 2007
  • Rising oil prices and an economic downturn in the US triggered by a fall-off in the housing market were among factors posing the biggest threats to continuing global growth
  • Trading imbalances at root of fears. China posted a record of $18.8 billion trade surplus with the rest of the world in August. The US, the world''s largest economy, has seen its trade deficit reach over $64 billion.
  • Potential for disorderly unwinding of global imbalance

IMF said central banks have to evaluate the risks of growth and inflation, adding that some more interest rate tightening might be necessary. Japan, which moved away from zero interest rates in June after six years, should continue to increase rates gradually, it added.

It has raised the forecast for India''s economic growth by one percentage point to 8.3 per cent from its April forecast of 7.3 per cent. The revised forecast is based on higher domestic demand and a surge in exports. The report, however, has cautioned against rising global oil prices and their impact on inflation, which has been rising. The IMF has prescribed a tighter monetary policy to curb inflation, even though such measures as increasing interest rates could also negatively impact the growth of the broader economy. If interest rates rise and global oil prices remain firm, GDP growth could be as per the earlier lower estimate of 7.3 per cent in 2007, the report cautioned. India''s economy has averaged about eight per cent growth in the past three years — among the highest in the world - and the momentum expected to be sustained till the end of the financial year, due to the expansion in manufacturing and services sectors. The IMF report comes days after the Indian government said industrial output logged an impressive 12.4 per cent year-on-year growth in July. The data showed a sustained increase in new investments by Indian companies. Rising middle-class incomes are driving demand for more cars, houses and a variety of consumer goods, while improved productivity is helping Indian companies boost exports. In the first four months of the current financial year (April-July), the country''s merchandise exports grew 21 per cent from a year ago. India''s outsourcing revenue is also growing at about 30 per cent with more western firms shifting back-office operations and software development work to India. The IMF, however, warned against the government''s high fiscal deficit. "Strong spending pressures have emerged, limiting fiscal adjustments in the year 2006-7 after more substantial consolidation in recent years," the report said. Although the government aims peg its budget deficit under Rs150,000 ($33 billion), or 3.8 per cent of India''s gross domestic product, this year, experts doubt its feasibility amidst increased spending on fuel and food subsidies.

Projecting India and China as the twin engines driving the roaring economies of emerging Asia, the IMF said "On the upside, there is the possibility of even faster-than-projected growth in China ... And in India."

The IMF report, however, said a general increase in interest rates might be necessary to check inflationary pressures.

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IMF bullish on global growth; raises Indian growth estimate to 8.3 per cent