Global economic recovery to be sluggish: IMF

Excerpts from Your World at 10 on CNBC-TV18 Watch the full show » Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: I have a question on India - both for the forecast for 2009, as well as for 2010, you've upped your India forecast by almost a percentage point. What encouraging signs did you see that gave you confidence in the Indian economy, and what will you be watching for to see whether you can maintain that forecast, or that you might need to revert back to the earlier growth numbers?

A: Well real GDP has surprised on the upside in the first quarter. And we have also observed that there has been more strength in domestic demand in India than what we had anticipated.

Now in addition you had the upgrade of our forecast elsewhere in the world, which will benefit India's exports and industrial production which are still weak for the moment. So, putting these two factors together led us to revise upwards our growth forecasts for India for this year and for next year.

And as far as things to watch out are concerned, key will be how the recovery in Asia in general will unfold and whether we see signs of further stabilisation in financial markets in advanced economies. This is absolutely central.

If financial markets stabilise further and return more to normal in advanced economies, and the recovery of demand and production in Asia is sustained, then this should also pull India along.

Q: Do you see more risks to the downside, or do you see more potential on the upside when it comes to your India forecast, and actually, I'd like to extend that question to your global outlook as well?

A: On the whole in the global outlook we still see the risks to the downside predominating those to the upside. As I said, key risks to the downsides are that the increase in unemployment and corporate bankruptcies affect financial systems more than what had been expected right now in financial markets. If there is renewed bout of unrest or uncertainty in financial markets, this would then hamper credit and this in turn would hamper the recovery. I think this is a key risk.

The second key downside risk is policies. Because they are seeing some stabilisation in markets, they are no longer pursuing vigourously the restructuring of the financial sector. These are the two key risks on the downside.

Now on the upside, it may well be that domestic demand in emerging economies is stronger than what we have forecast. I mean we have already revised up our forecast for India and for China for example. We could not exclude that there are renewed surprises on that front. But on the whole, for the world, we see the risks on the downside dominating.

And for India, specifically, because the outlook in the world is so uncertain, and because ultimately emerging economies also rely on demand by advanced economies, we would also say that the risks are probably slightly tilted to the downside.