On cliff’s edge

On Day One of the new year, the Indian stock market cheered Obama's effort to avert the fiscal cliff. The benchmark index showed a remarkable bounce on the optimism over the soft landing of the US fiscal cliff. But the key question is whether the global economy will indeed see a sustained recovery in 2013. India's performance will also partly depend on that because the Indian trade to GDP ratio has doubled from 21 per cent to 43 per cent over the past decade. What happens in the rest of the world affects us profoundly.

What does 2013 have in store for the global economy? Most analysts say the world growth rate this calendar year will probably be marginally more than the GDP growth of 2.5 per cent seen in 2012, unless there are some big surprises. The IMF forecast for global GDP growth is 2.9 per cent in 2013 and 3.5 per cent in 2014. Indeed, it appears that global growth is bottoming out and the second half of 2013 should see some pick up in GDP growth. India's GDP growth also appears to be bottoming out at 5.5 per cent, the lowest quarterly number in a decade.

A global recovery will certainly give further momentum to domestic policy efforts to kickstart investment and growth in the economy. I have always maintained that the policy paralysis of 2011 and the first half of 2012 was only partly responsible for GDP growth falling so sharply — by nearly 4 per cent off the peak. For, other economies, such as China and Brazil, also experienced growth rates decelerating by 4 per cent. India could not have averted a fall in its growth rate to the extent to which it is in sync with the rest of the world.

Of course, with some global recovery, India can quickly come back to 7.5 per cent-plus GDP growth because the domestic potential for growth is immense. Some of the global markers that appear to be very positive in 2013 are a possible recovery in the US economy, fuelled by lower energy costs and an improved housing market, and the peripheral economies in the eurozone improving their public finances substantially, thus creating a positive sentiment.

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