Oct 12, 2017 02:01 PM IST | Source:

Global economy looking up but India on a slow lane – how should market read this?

IMF's report recently downgraded India's growth prospects. India has its back to the wall with windfall gains from falling crude might not be available soon.

In its latest report, IMF has estimated that all major economies in the world will grow, even as it downgraded India's growth. It has revised upward the growth estimates for the Euro area, Japan, China, Russia and emerging Europe, compared to July update. But India received a major downward revision.

A downward growth revision wasn’t totally unexpected in light of transitional effects of twin policy initiatives of GST and demonetization. Though IMF expects a rebound in GDP growth rate next year, new projections are lower for next year as well (7.4 percent vs. 7.7 percent earlier).

Overall, broad-based global growth recovery brings good news but disappointments on the domestic front lead us to look at India’s contribution in global growth and the impact of commodity movements for a net importer like India.

Global growth inching up: Advanced economies lead

IMF’s review on global growth is positive wherein it observed firmer domestic demand growth in advanced economies as well as China.


Source: IMF

Amongst advanced economies, the Euro area and Japan, in particular, benefitted from consumption and external demand. Major emerging markets like Brazil, Russia and east Asian markets also saw improvements on account of better external demand.

India – a better tomorrow but limited contribution to global growth

As per IMF, in the medium term, India is expected to grow above 8 percent in the medium term and its contribution to world’s GDP growth looks noticeable when seen in the context of purchasing power parity. (Purchasing power parity: the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other).

However, India’s contribution to global growth seems modest, particularly when compared to its closest EM peer – China. As per IMF, India’s contribution to GDP growth is only 19 percent of the overall contribution by advanced economies and only 21 percent of that by China. Even after a higher projected GDP growth rate for India and the structural changes China is going through, by the year 2022, India's contribution to global GDP growth would be less than 1/3rd that of China.


Source: World Economic Outlook, Oct-2017 - IMF

Who contributes to global growth?

As per our back-of-the-envelope calculation, India’s contribution to world’s incremental GDP growth is expected to be about 4 percent in 2018. However, China, despite its structural course correction, would have a 23 percent share of the world’s incremental GDP growth. Hence, the bulk of the emerging market share in global GDP growth would continue to come from China.

Advance economies particularly, the USA, Euro area and Japan would contribute 40 percent of incremental global growth in the coming year. This basically underscores the macro recovery comfort that global equity markets are pricing in. Recent economic fundamental data also point towards same direction.


Source: IMF, World Bank, Moneycontrol Research


Source: IMF, World Bank, Moneycontrol Research

Windfall from oil no longer available for India

The IMF report analyses the impact of commodity price trends on commodity exporters and importers. World economic outlook highlights that India, being one the key beneficiaries of lower oil prices in last few years, has accrued windfall gains in 2015 and 2016. However, in 2017 and 2018, it is projected to have loss of 0.43 percent of GDP due to higher oil and commodity prices.


Source: IMF

While the IMF expects crude oil prices to settle around USD 50 in 2018, one of the implications is that windfall gains available in the past in the form of higher disposable income would not be available in the foreseeable future.

For more research articles, visit our Moneycontrol Research Page.


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