Need pragmatism to tackle the slowdown

While markets will push for things such as lowering the fiscal deficit and debt-GDP ratio, recent experience has taught us that adequate food stocks and foreign exchange reserves are equally important when managing a crisis

International Monetary Fund (IMF) managing director Kristalina Georgieva has warned that one-third of the global economy could face a recession this year, which could be a more difficult year than 2022. Ms Georgieva’s comments laid the ground for further slashing of Gross Domestic Product (GDP) growth rates when the IMF releases updates to its World Economic Outlook (WEO) later this month. The October 2022 edition of the WEO projected a 2.7% GDP growth for the global economy in 2023. World GDP is expected to have grown at 3.2% in 2022. To be sure, the war in Europe and China’s mismanagement of its Covid-19 policy are significant contributors to the slowdown.

IMF Managing Director Kristalina Georgieva, Berlin, October 26, 2022 (REUTERS)

The Indian economy, which will continue to grow by 6.1%, according to the IMF’s October update, will not be immune to the worsening global economic outlook. What is the best possible policy course in such an environment? Three guiding principles will be helpful. First, policy should be risk averse as far as trying untested ideas is concerned. Second, with the export engine of growth expected to slow, pump-priming domestic growth will be important to avoid a significant loss in economic momentum. This cannot be achieved without addressing the challenge of the K-shaped recovery post-pandemic. Last but not least is the challenge of adopting a pragmatic approach to macroeconomic stability. While markets will push for things such as lowering the fiscal deficit and debt-GDP ratio, recent experience has taught us that adequate food stocks and foreign exchange reserves are equally important when managing a crisis.