|Pranab's Merkel problem|
|Friday, 20 January 2012 00:00|
Impact of Europe likely to be FM’s biggest worry
While most are looking, as indeed they should, to the Budget for signals on how FY13 will pan out, it is equally important to keep an eye on how the European crisis pans out. Though the World Bank cannot obviously support the argument made by well-known economists/analysts that Angela Merkel’s insistence on fiscal austerity will put Europe on a self-fulfilling downward spiral, its latest growth projections point to a sharp deterioration in Europe and “the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains.” IMF chief Christine Lagarde has already said IMF will be lowering its 2012 outlook on January 24 and, if the Bank projections are anything to go by, the lowering could be quite dramatic. The Bank has lowered its global growth forecast for 2012 from 3.6% projected in June to just 2.5%—the 2013 projection has also been lowered, from 3.6% earlier to 3.1% now.
US projections remain on track—the Bank is looking at a 2.2% growth in 2012 versus OECD’s 2% projection in November last year and IMF’s 1.8% in September (given better than expected results from the US, IMF will likely also raise its forecast). The Bank now projects the euro area will contract by 0.3% in 2012—OECD had projected a 0.2% growth and IMF 1.1% (given the rapidly worsening situation since IMF made its forecast, the largest cut in IMF forecasts are likely to be in this area).
The most obvious manner in which the Europe crisis will hit India will be through the trade route since a fifth of India’s exports are to Europe—the figure is nearly 50% in the case of certain exports like readymade garments. Though Europe’s share in India’s IT exports is also quite high, Indian IT majors have managed to keep their head above water (see What European crisis? alongside this piece). Global trade volumes, the Bank points out, fell at an annualised pace of 8% during the three months ending October 2011, mainly due to a 17% annualised fall in European imports. The larger impact, however, will come from the financing end. Overall gross capital flows to developing countries fell to $170bn in the second half of 2011 as compared to $309bn in the same period in 2010. Equity flows fell a whopping 80% and bond issues halved. In 2012, the Bank is projecting net private flows that are even lower than those in 2011. In other words, if India’s growth in 2012 has to even remain at the same level as in 2011, the additional push that needs to come from domestic reforms has to be even larger than that envisaged a few months ago.