UNCERTAIN WORLD ECONOMIC OUTLOOK.

 The July update of World Economic Outlook released by International Monetary Fund gives a gloomy and uncertain picture of global economy.According to IMF a tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022.Eventhough performance was slightly better than anticipated in the first quarter global output had shrunk in the second quarter- the first contraction since 2020 owing to economic downturns in Russia and a sharper than anticipated slow down in China reflecting covid19 outbreaks and frequent  lockdowns and further negative cross border effects of war in Ukraine. High  inflation world wide particularly in US and major European economies which have resulted in a quantitative restrictive policy adopted by the central banks triggered a sharp tightening in global financial conditions. US Federal Reserve increased interest rate by 0.75% continuously second time while European central bank raised key interest rate by 0.5% first time in 11years.Geo political tensions following Russian Ukraine war, increasing prices of critical inputs like crude oil and commodities and higher  borrowing costs have prompted IMF to warn about the uncertainty and possibility of a global  recession. A recession refers to significant decline in economic activity spread across the economy, lasting more than a few  months normally visible in decline in real GDP, real income,employment, Industrial production, wholesale and retail sales  etc.Significantly output, employment, and consumer spending drastically decline during the recession. It may be noted here that even though technically speaking if generally GDP contraction take place continuously for two quarters it can be termed as recession, but factors other than GDP like employment needs to be taken into account to give exact picture.

As per latest global PMI (Purchase Managers index) for USA and Euro zone countries economic activity in July  is far from reassuring, output across Europe's major economies sharing the Euro as a common currency shrunk for first time since February 2021 as the worsening manufacturing downturn combined with a slow down in the service sector led the composite index into contraction territory. US economy has now contracted for two successive quarters putting it on the edge of recession and witnessed manufacturing PMI at its lowest level in two years .As per IMF's updated projections while world output is projected to grow 3.2% in 2022 and 2.9% in 2023, in advanced economies it is 2.5 and 1.4 respectively.In US it is 2.3 for 2022 and 1.0 for 2023 as against 2.6 and 1.2 respectively for Euro zone.While Japan is projected to grow 1.7 % in both years ,UK will grow at 3.2% in 2022 and decline to 0.5% in 2023, but Canada on the other hand is projected to grow 3.4% and 1.8% respectively.Emerging Market and Developing economies is  projected to grow 3.6% in 2022 and increase to 3.9% in 2023 in which China's growth is forcast to grow 4.6% in 2022 and 5.0% in 2023. Quite significantly India has relatively robust projection of 7.4%  in 2022 and 6.1% in 2023,on the contrary  Russia has projected to contract  -6.0% and -3.5% respectively in 2022 and 2023.India's growth projections have been revised by other agencies like Asian Development Bank to 7.2% and RBI 7.2 %  in 2022-23 whereas OECD projected 6.9% in 2022-23 and 6.2% in 2023 -24.

The  projections for global inflation is more gloomy.In US consumer price index rose by 9.1% in June compared with a year earlier, which also rose to 9.1% in the UK in May- highest inflation rates for both in 40 years.Similarly after the inception of European Monetary Union Euro area witnessed the highest inflation rate of 8.6% in June 2022.Apart from that  Emerging market and developing economies second quarter inflation is estimated to be 9.8 %.Although India's retail inflation remained above 7% it declined from 7.4% in April to 7.04% in May and 7.01% in June 2022 . According to IMF higher energy and food prices, supply constraints in many sectors, and a rebalancing of demand back toward services have in most economies resulted in high inflation.Higher than expected inflation globally in turn have led to a quantitative restrictive policy adopted by central banks triggering higher financial discipline.With price rise squeezing living standards across the globe taming of inflation became the first priority of policy makers.While tighter monetary policy will inevitably have real economic costs, targeted fiscal support can help to cushion the impact on the most vulnerable.But with government budgets being stretched due to the pandemic and need for a disinflationary macroeconomic policy stance, fiscal policy will need to be offset by increased taxes or lower government spending.

As far as India is concerned country is  expected to perform better than the rest of the world because domestic economic factors are showing broad based improvement with the exception of distress in external trade sector and rising current account deficit.Despite global headwinds, in India higher capacity utilisation for manufacturing is picking up besides high frequency service indicators and increasing credit growth, consumer sentiment is gathering momentum,higher financial stability and availability of adequate(fourth largest) foreign exchange reserves offer the cushioning effect to the economy against recession.However inflation is projected to remain above the upper tolerance level of 6% throughout 2022-23 and RBI retained it's projections of inflation at 6.7% and GDP at 7.2%. RBI expects CPI inflation to decline from 7.1% in Q1of financial year 2022-23 to 5% in Q1 of 2023-24. To tackle inflationary pressures RBI has further increased the policy repo rate by 50 basis points to 5.4%.While domestic economic activity is in a recovery mode tighter monetary policy and macro economic stress in some emerging economies and recession in US are bound to affect adversely our exports growth despite depreciation of the rupee.From RBI's perspective if the CAD crosses 2.5% of GDP we need to find out whether we have adequate capital inflows to bridge the CAD and if we do then even if CAD is at 3% it might not be strenuous to the economy. Current rupee depreciation pressures are relatively more contained than in 2013.However higher inflation and tighter monetary policy not only would dampen local demand but also adversely affect sectors like housing and real estate. In any case RBI's calibrated policy responses so far have been effective in dealing with excess volatility of exchange rate and cautiously managing foreign exchange reserves. While monetary policy is focusing on reducing inflation fiscal policy should focus specifically on stabilising debt to GDP ratio and providing safety nets to the needy and distressed sections. Experts observed that to finance additional expenditure either increase the corporate tax or do away with the existing corporate tax concessions in  India which alone can bring about whopping rupees five lakh crores to the exchequer In short along with monetary policy more fiscal and other policy interventions are required to  maintain growth, stability and our unique position in the world economy.