The World Bank has released its latest set of forecasts
for the world economy. There are several interesting nuggets about the
trajectory of various economies in the coming years.
First, the year 2014 is expected to see a recovery in global
economic growth. This will be led by the rich countries despite the fact
that they are being weighed down by fiscal austerity measures.
Second, a demand recovery in the rich countries could
give a boost to exports from countries such as India. We have already
seen this in recent months, as the recovery in the US as well as a more
competitive rupee has benefited net exports.
Third, the gap between economic growth rates in India and
China could narrow to a sliver by 2016. Chinese economic growth will
remain at current levels while Indian growth will accelerate. There will
be only a 0.4 percentage point gap in 2016 compared with the 3.1
percentage points gap in 2014.
Fourth, economic growth in the developing countries is
about 2 percentage points lower than what it was during the 2003-07
boom. They will not cover the entire lost ground because growth in those
years was unsustainably high. But growth in the developing countries
will continue to be higher than in the rich countries as well as more
impressive that in the last two decades of the previous century.
Fifth, India will be close to its potential growth rate
in 2016—which is still more than 2 percentage points below its peak
during the boom years. The potential growth rate is what it can sustain
without generating imbalances such as high inflation and a wide current
account deficit.
Sixth, the effects of the tapering of quantitative easing
in the US and the structural shifts taking place in China—from exports
to domestic demand and from investments to consumer spending—will be two
developments to be watched, for they can upset the new growth
forecasts.
Mint is broadly in agreement with what the World
Bank has said, even though it is sceptical about the pace of the
recovery in the Indian economy that is being forecast over the next
three years. There are signs that the Indian economy cannot lose further
momentum from here. But it is not clear that there will be a sharp
growth recovery without domestic policy support. Inflation continues to
be a worry.
To be sure, strong rural demand following a good monsoon
could support a mild growth recovery. The exports recovery will also
help.
But it is very unlikely that India can get to its
potential growth rate of around 7% without a recovery in the investment
cycle. That will require policy stability, economic reforms,
macroeconomic stability and a switch in government spending from
subsidies to capital expenditure. Much of that will be clear only when
the next government takes charge in New Delhi.