Economy
Caution is the buzzword as IMF warns of persistent risks

The IMF says growth and recovery is taking root in global markets, but it advises financial policymakers to be cautious as high unemployment, rising commodity prices, inflation and increasing oil prices could slow growth in the medium term

The International Monetary Fund (IMF) in its annual World Economic Outlook (WEO) report has asserted that the global economy is indeed on a path of recovery, but it has cautioned about the gathering clouds on the horizon that could likely dampen progress. The IMF expects an economic growth rate of 4.5% for both 2011 and 2012. While the developed economies are growing at 2.5%, it estimated that the developing world has picked up pace to reach an average rate of 6.5%.

However, there are many concerns that threaten the recovery -

  •   Political turmoil in the Middle East and North Africa has caused disruptions to the supply of oil, pushing oil prices northward.
  •   Inflation, especially in emerging economies, remains high, forcing policymakers to tighten money supply at the expense of growth.
  •    Unemployment, a legacy of the financial crisis in 2008, continues to remain high across the developed economies.
  •     The banking system is struggling to meet capital adequacy norms, thanks largely due to significant levels of non-performing assets.
  •   Rising commodity prices are pushing industry to go slow on capacity utilisation and expansion.
  •   High interest rates and limited credit lines are adding to the woes, ensuring that industrial growth remains subdued.

Reserve Bank of India (RBI) governor Duvvuri Subbarao expressed just as much during his recent visit to Washington, for the spring meetings of IMF and World Bank. "The global recovery may be jeopardised by a sustained rise in oil prices," he said. "Speculative movements in commodity derivative markets are also causing volatility in prices." Whether the G-7 and OPEC heed his warning by addressing the supply-side economics remains to be seen, but the mood on the street remains far from optimistic.

Dalal Street is waiting to see the final quarter results from India Inc. before pushing up the sails. Infosys has set off disappointment in the market and much will be made out of the numbers that Tata Consultancy Services presents on 21st April. Equally important, if not more, will be the performance of the manufacturing industry, as they will be a more precise indicator of domestic economic health. Also, the impact of high oil and commodity prices will be captured in these performance numbers.

There are signs of concern in the just-released inflation estimate for March. Inflation rose to 8.98% from 8.31% in February, on the back of increasing manufacturing and fuel costs. With inflation rooted above 8% over the past 14 months, pricing pressures are ensuring that inflation remains high-recently car and garment manufacturers passed on price hikes to consumers, affirming this trend.

It is widely believed that revised inflation figures for March might edge into double figures after the rate for January was revised from 8.23% to 9.35%. With the RBI's efforts to fight inflation not yielding the desired results, markets are gearing up for a 0.5% increase in the inter-bank rate when the central bank issues its monetary guidance in the first week of May.

In a persistent bid to fight inflation, the RBI has already changed the rate eight times in the last 13 months, amounting to a 3.5% hike. "Underlying inflationary pressure is a concern and inflation is the most important problem in the short term," said the deputy chairman of the Planning Commission, Montek Singh Ahluwalia. "They (RBI) have all the flexibility and they should use all the flexibility to control inflation," he added, clearly suggesting that the bank ought to raise rates.

Monetary tightening is a pan Asia trend-China's inflation hit a 32-month high in March, ensuring that the People's Bank of China will continue to squeeze money supply. All of these actions are likely to slow down overall growth in the region as public policy battles rising prices. The IMF's outlook also acknowledged the role of foreign investment funds in the emerging Asian markets that is causing the overheating.

The delay in structural reforms has meant that most of the capital flows to the East have come in the form of portfolio investments, while FDI has declined. Inherently, this is a situation that lends itself to volatility. With oil likely to remain above $100 per barrel, markets may be dealing with more instability through the rest of 2011.

(The writer is a business consultant to large clients on financial processes, process re-engineering and improvement.)

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Third-party motor insurance premiums to go up by up to 65%

The premiums are being revised after a gap of four years, the Insurance Regulatory and Development Authority said, adding that from now onwards the third-party motor insurance premium rates would be revised annually

New Delhi: Owning a vehicle would now pinch your pockets even more, with third-party motor insurance premiums set to rise by up to 65% for two-wheelers, private cars and heavy load carriers from 25th April, reports PTI.

The premiums are being revised after a gap of four years, the sector watchdog Insurance Regulatory and Development Authority (IRDA) said, adding, from now onwards the third-party motor insurance premium rates would be revised annually.

The IRDA has also fixed a formula for revising the motor insurance premium rates, which would be done after taking into account inflation and data on claim settlement. These rates are currently regulated by the Tariff Advisory Committee of the IRDA.

As such, owners having third-party cover for private cars of 1,000-cc capacity would now have to pay premiums of Rs740, those exceeding 1,000 cc but below 1,500 cc will attract premium of Rs880 and those above 1,500 cc at Rs2,750.

"If the premium rates get revised annually on specified parameters it will save a lot of time which gets wasted on account of negotiation with several associations," National Insurance Company CMD NSR Chandraprasad said.

The third-party cover for two-wheelers of up to 350 cc capacity would attract premium of Rs330 and those exceeding 350 cc would cost of Rs680.

Insurance companies had actually sought a 150% hike in premium rates as these companies are bleeding on account of high claim to premium cost.

However, IRDA in its exposure draft had suggested a 10% increase in premium for private cars and two-wheelers and up to 80% for goods carriers.

Though regulation of the tariffs in the non-life sector was withdrawn in 2007, third-party motor insurance continues to be regulated.

It is mandatory to for a vehicle owner to obtain third-party insurance to provide insurance cover to others in case of injury or loss of life.

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Surging oil prices may jeopardise global economic recovery: RBI chief

RBI governor D Subbarao, while addressing an IMF meeting in Washington, said while the trough of the crisis definitely appears to be behind and there are signs the recovery is consolidating, new challenges facing the global economy render it vulnerable

Washington: India has warned that surging oil prices could jeopardise recovery of the global economy which is already vulnerable to a variety of risks, including political and social turmoil in parts of the world combined with natural disasters, reports PTI.

"The global recovery may be jeopardised by a sustained rise in oil prices," Reserve Bank of India (RBI) governor Duvvuri Subbarao told the Spring Meeting of the International Monetary Fund (IMF) here last evening.

"Apart from the inflationary pressures confronting particularly the emerging and developing countries, there is the danger of a slowdown in the global economy unless oil prices moderate from current levels," Mr Subbarao said in his address to the International Monetary and Financial Committee.

Furthermore, since the summer of 2010, several natural calamities and consequent food supply constraints have collided with the post-crisis resurgence of demand, he noted.

"World food prices have surged considerably due to concerns about low future supplies because of bad weather and low inventories, raising concerns about food security.

Speculative movements in commodity derivative markets are also causing volatility in prices," he said.

A variety of risks, including political and social turmoil in parts of the world combined with natural disasters, have made the global recovery vulnerable, Mr Subbarao said, adding that financial conditions have turned volatile and uncertain, with risks of adverse feedback loops into the global economy.

"Recurring sovereign debt fears have affected market confidence. In the crisis-affected economies, financial systems are yet to be fully repaired. While the sense of crisis has waned, new challenges have surfaced," he said.

Mr Subbarao said while the trough of the crisis definitely appears to be behind and there are signs the recovery is consolidating, new challenges facing the global economy render it vulnerable.

"We have to remain vigilant and be prepared to deal with all threats, old and new, as we repair and rebuild. The global problems we are facing today are complex and not amenable to easy solutions," he said.

Many of them require significant and often painful adjustments at the national level, and in a world divided by nation-states, there is no natural constituency for the global economy, he said.

At the same time, the global crisis has shown that the global economy as an entity is more important than ever, Mr Subbarao said.

"Given the deepening integration of countries into the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone," he said.

Noting that the overarching problems confronting the international monetary system stem from weaknesses in detecting and communicating early warnings of impending crises and management of global liquidity, the RBI governor said this calls for fundamental reform of the international monetary system.

"It is also important to evolve a mechanism to address the challenges of stemming volatile capital flows and to strengthen multilateral adjustment mechanisms to deal with imbalances and sources of instability," he argued.

Stating that the surveillance function is critical to the IMF's overall mandate, Mr Subbarao stressed that ensuring consistency and comprehensiveness across the various levels of surveillance is important, as is the candour and even-handedness of the IMF-that systemic risks are pointed out irrespective of where they may originate.

"We need to stress that multilateral surveillance by the IMF should not lose sight of sovereign debt concerns of developed countries by adopting tighter screening criteria for developing countries that have actually seen fiscal improvement relative to the advanced economies," he said.

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