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IMF’s Christine Lagarde says India could fuel global growth

Livemint:  March 17, 2015

New Delhi: With a projected growth rate of 7.5% in 2015-16, India will become the world’s fastest growing major economy, fuelling global growth at a time when advanced economies are under stress and other emerging economies are slowing down, International Monetary Fund (IMF) managing director Christine Lagarde said on Monday.

Delivering a lecture on Seizing India’s Moment at Lady Sri Ram College, Lagarde said this is a special moment for India. “Just as many countries around the world are grappling with low growth, India has been marching in the opposite direction... In this cloudy global horizon, India is a bright spot,” she said.

More than six years after the global financial crisis, the recovery remains slow, brittle and lopsided. The IMF has pared down its forecasts of global growth since last October, to 3.5% in 2015 and 3.7% next year, despite the boost from cheaper oil and stronger US growth. China’s growth is also slowing to more sustainable levels, leaving India among the major economies to show resilience with growth expected to accelerate from a projected 7.2% in 2014-15 to 7.5% in 2015-16.

Lagarde said by 2019, the Indian economy will more than double in size, compared with 2009. “When adjusting for differences in purchase prices between economies, India’s GDP (gross domestic product) will exceed that of Japan and Germany combined. Indian output will also exceed the combined output of the three next largest emerging market economies—Russia, Brazil, and Indonesia. So, clearly, India’s weight among the group of emerging markets will increase,” she added.

The IMF chief said while it is clear that India can run, the question is whether it can fly. “I believe it can. As India grows and takes its rightful place in the global economy, the focus should remain on sound policies and inclusive institutions,” she said.

The conditions are ripe for India to reap the demographic dividend and become a key engine for global growth, Lagarde said. Much of this has to do with population growth. More than 50% of India’s population is currently below the age of 25, and more than 12 million people enter the labour market every year. By 2030, India is expected to have the largest labour force in the world.

“At more than one billion people of working age, India’s labour force will be larger than the combined labour force in the US, the Euro Area, and Indonesia. The potential benefits to be reaped from your collective work efforts could be enormous,” Lagarde said.

Lagarde said for India to achieve its true potential, it has to carry out structural reforms such as further subsidy reforms, implementation of the goods and services tax, making labour laws more flexible.

The IMF chief also batted for a “sound and healthy financial sector” to support strong and sustainable growth. “This requires banks, including public sector banks, with strong balance sheets. Higher capital injections and improved operational efficiency can certainly help in strengthening banks’ balance sheets. But there can also be synergies between fiscal consolidation and financial intermediation. As the fiscal deficit continues to shrink, Indian banks can re-orient their balance sheets away from holding government securities towards more lending to the private sector for investment and growth,” she added.

Referring to the government’s “Make in India” initiative and Reserve Bank of India governor Raghuram Rajan’s counter proposal of make for India, Lagarde said while they are laudable objectives, they require an open and competitive business environment to flourish, and they need reliable and affordable sources of energy, transportation and communication.

“Many of these projects were delayed due to regulatory uncertainty and bureaucratic hold-ups. Much needs to be done in easing land acquisition, expediting clearances and establishing a stable regulatory regime so that the private sector can invest. These issues are on the radar of policymakers, which is promising. They must be on the action list,” she added.

Lagarde cautioned that emerging and developing economies could face a triple hit of a stronger US dollar, higher global interest rates, and more volatile capital flows, if the US Federal Reserve raises its interest rate. “A stronger dollar will have a significant impact on financial systems in emerging markets, including India, because many banks and firms have increased borrowing in dollars in the past five years,” she said. However, she later said, India is well prepared and fundamentally strong to deal with any such situation.

The Fed, at its meeting ending Wednesday, is expected to signal an increase in its ultra-low interest rates by as soon as June, potentially triggering capital outflows from emerging markets that have been flooded with cheap dollars.

In September 2013, Ben Bernanke, the then Fed chairman, caused a heavy sell-off in the rupee, bonds and stocks when he announced that the American central bank was to scale back its $80 billion-a-month quantitative easing programme.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

x IBEF : India Brand Equity Foundation