Even as the gathering pace of global economic recovery is reassuring, the persistence of low productivity and potential growth in advanced economies remains worrisome, Union Finance Minister Arun Jaitley has said.
In his address to the annual meetings of International Monetary Fund and World Bank, Jaitley said it is reassuring that economic recovery has gathered pace.
Global GDP growth is poised to increase in 2017 and 2018 with improving traction in growth performance in the euro zone, Japan, emerging Asia and Europe, as well as in Russia, he noted.
While the persistence of low productivity and potential growth in advanced economies (AEs) remains worrisome, growth in emerging markets and developing economies (EMDEs) is expected to recover going forward, he said.
The prospects in commodity exporting countries continue to remain challenging due to ongoing adjustments to low commodity prices, he added.
“India will continue to perform robustly on the back of credible macroeconomic adjustments and structural reforms,” Jaitley said.
Noting that the near-term global financial stability has also strengthened due to cyclical recovery in global growth amid supportive monetary conditions, he said on the other hand, although improved capital and liquidity buffers have enhanced the health of the banking sector in general, many of them continue to grapple with legacy problems and low profitability.
Moreover, financial risks stemming from the rapidly raising leverage of the private non-financial sector amid low interest rates have increased medium-term risks to financial stability, he said.
Sudden reversal of monetary accommodation by AEs could increase policy strains in EMDEs, he cautioned.
“The risks of growing populism and consequential loss in trade volumes will affect global recovery adversely – and it is incumbent upon all of us to foster cooperative multilateral efforts to boost fair trade practices,” he said.
Observing that growth in the US and the euro zone is expected to improve in 2017 compared to 2016, he said the recovery in Japan is continuing and is likely to get better in 2017 on the back of stronger domestic and external demand.
It is now well understood that monetary policy accommodation alone may not be enough to re-energise growth in AEs, and structural reforms in alignment with growth supportive fiscal policies would enhance productivity and potential growth, he told the gathering of world financial leaders.
Jaitley said improved momentum in the Chinese economy during the first half of this year due to rising domestic demand is reassuring for global growth, although the risks to financial stability owing to large overhang of financial leverage require close monitoring.
Going forward, Brazil is expected to overcome recession and Russia is likely to grow robustly this year on recovery of domestic and external demand.
Sub-Saharan economies are also likely to improve their performances this year.
“As for the Indian economy, the sound fundamentals and number of progressive policy initiatives taken in the last few months will provide the basis for a strong prognosis and convergence with growth potential,” Jaitley said.
Of the view that growth in EMDEs is poised to strengthen this year, he said, however, commodity-exporting countries among them remain challenged by their ongoing adjustments to declining export earnings.
“Policy frameworks would have to be strengthened by implementing structural policies in alignment with fiscal policies such as promoting growth friendly investments and/or building buffers where the fiscal space is limited. At the same time, proactive micro and macro prudential policies would be needed to sharpen risk management practices to reduce financial vulnerabilities and enhance resilience,” he said.