Trending Personality: Gita Gopinath’s views on global growth and the risk of tightening FED policy

The IMF has slashed India's growth projection by 0.5% for 2022 to 9%.

Gopinath — the first female Chief Economist in IMF history—has a proven track record in leading analytically rigorous work on a broad range of issues. In this article, we will go through some of her points discussed in a recent interview regarding the global economic outlook, the implications of the Fed policy tightening, and India’s growth projection for 2022.

According to the IMF World Economic Outlook update for January, global growth is expected to moderate from 5.9 in 2021 to 4.4% in 2022 — half a percentage point lower for 2022 than in the October World Economic Outlook (WEO), largely reflecting forecast markdowns in the two largest economies – the United States and China. Gita explains that there are very different factors behind the downgrades for the United States and China. For the United States, it is lower fiscal support and a turn in monetary policy, apart from supply disruptions that have lasted longer than expected that have together brought a 1.2 percentage-points downward revision. Whereas, pandemic-induced disruptions related to the zero-tolerance COVID-19 policy and protracted financial stress among property developers have induced a 0.8 percentage-point downgrade in China.

Coming to the implications of the Fed tightening for global markets and emerging economies, Gopinath said that should the rise in rates be faster than expected, it would result in excessive turbulence and costs shooting up all around the world, and this will have an impact on many emerging and developing economies. She explained that as compared to 2013-14, several countries have more foreign exchange reserves and do not rely heavily on foreign currency borrowing. But on the other hand, some countries have large external financing needs, that are borrowing in dollars, and these are particularly susceptible.

Finally, speaking on IMF’s cut on India's growth projection for 2022 to 9% from 9.5%, Gita said that the small downgrade was because of Omicron and its concentration in the first quarter of this calendar year. This has resulted in the postponing of the expected recovery this year and the IMF upgrading the growth figure by 0.5% in the fiscal year 2022-23 instead. She went on to say that the stress in the Indian financial sector is somewhat less than last year, and that is a positive in terms of the recovery. However, there still exists a challenging environment within India and globally, given monetary policy tightening in the U.S. and its implications for interest rates, alongside energy prices which could shoot up some more. All of these could be challenges for India.