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.