What might 2011 hold for us? Given the intrinsic uncertainty about the future, the really honest answer would be: I don’t know. But that would be far too boring a response and, perhaps more to the point, would not fill a column. So, at the risk of looking foolish in a year’s time, here are some predictions (in bullet form) for 2011.
World: Economic/Financial
- After a surprisingly strong recovery in 2010, next year will also be pretty good, with world output growing by 3.5 per cent (at market exchange rates).
- The biggest (by far) industrial country, America, will turn in a remarkably strong performance with growth around 3 to 3.5 per cent, thanks to the continuation of extremely lax monetary policy and the recent agreement on tax cut measures, which are estimated to amount to a stimulus of around 2 per cent of GDP in the coming year.
- In contrast, Europe, and especially the eurozone, will continue to be plagued by threats of sovereign default by one or more of the “PIGS in the periphery”. Even if that spectre is kept at bay through huge bailout packages from the European Financial Stability Facility and the IMF (which now seems to lend its globally garnered resources mainly to Europe!), fiscal austerity programmes will keep growth very subdued throughout Europe, except for Germany. Overall, Europe might grow at 1.5 per cent.
- For somewhat different reasons, that is also the expected growth in Japan.
- The big impetus to global growth will come, once again, from Emerging Asia, with China growing at 10 per cent, India at 8 and Indonesia at 7. Together, Emerging Asia will account for half of world economic growth.
- World trade volume will expand by 8 to 10 per cent and guess who (yes, China) will increase its share of global trade.
- Exchange rates will be volatile, especially if there are any major disruptions in Europe. Despite enormous strains, the euro is likely to survive but it’s not a sure bet.
- Although there will be plenty of liquidity from loose monetary policies, the yields on long government bonds will rise as major industrial nations strive to fund their large fiscal deficits in the context of reviving private sectors.
- Inflation in rich nations will remain low, but will increase in most of the emerging world because of rising commodity prices and buoyant capital inflows in search of yields.
- Strong global growth and speculative factors are likely to keep oil prices high, in the range of $80-110 per barrel.
India: Economic/Financial
- Despite the prevailing despondency about deep-seated corruption and weak governance, the economy will probably grow at 8 per cent.
- Because of the fast-growing labour force, the unemployment/underemployment situation for the unskilled will worsen, but we won’t know for lack of data!
- The combined (Centre and states) fiscal deficit is likely to remain high (at around 8 per cent of GDP), despite government commitments on fiscal consolidation.
- Such high borrowing requirements will inevitably keep the benchmark 10-year government bond at or above the current 8 per cent, especially given likely further increases in the short-term policy rates.
- While the headline inflation rate might drop to 6 per cent or so in the spring, average inflation for the year (y-o-y) is likely to remain above 6 per cent, mainly because of price increases in food and fuel.
- High interest rates and subdued “animal spirits” (because of the scams and confusion in political responses) could cause some decline in India’s high (35 per cent of GDP) investment rate, with growth-reducing consequences for the future. With luck, the decline will be small.
- The current account deficit in the balance of payments will remain high at 3-4 per cent of GDP and could go higher if oil prices climb above $100/barrel. That will damp capital inflows and contain the appreciation of the rupee, even if RBI continues to refrain from long overdue corrective actions. India’s financial vulnerability to external shocks will increase. In their absence, the INR/USD rate will range between 43 and 46.
World: Political/Security
- America, still the world’s single superpower, will withdraw nearly all forces from Iraq and begin a token withdrawal from Afghanistan in the summer, despite limited military progress against the Taliban. As American forces withdraw, Taliban will feel stronger but there will be no decisive endgame in 2011.
- China will continue its new “assertive” foreign policy, with occasional unpleasant surprises for some neighbours (including us).
- North Korea will remain unpredictable and difficult, but a reignition of the Korean war will be avoided.
- The chances of an Israeli strike on Iranian nuclear facilities will rise higher than ever before, but may not happen. If it does, there will be a massive spike in oil prices and a great deal of unpleasant, unintended consequences.
- Terrorism will continue to be endemic in Iraq, Afghanistan and Pakistan and so will the possibility of serious attacks in India, Europe and America.
- There will be no Israeli-Palestinian accord.
- Japan will have a new prime minister but the country’s reliance on America and redeployment of defensive forces to face China will continue.
- There will be no comprehensive, international treaty binding national carbon emissions to mitigate climate change.
India: Political/Security
- Dr Manmohan Singh will continue as prime minister, health permitting. His ministerial colleagues will also continue to be fractious and unmindful of disciplines of collective responsibility.
- Corruption scandals and scams will continue to unfold but there will be some significant corrective actions, such as initiation of legislation for state funding of elections.
- In West Bengal, the CPM will lose its control over the state government after more than 30 years. In Tamil Nadu, DMK will lose power.
- Terrorist attacks will be carried out by both internal and external forces. If there is a major attack with clear links to Pakistan, government will feel compelled to take retaliatory action.
- There will be a “Telangana Crisis” once the Justice Srikrishna report and the central government’s response become public.
- India will strengthen ties with her eastern neighbours, including Myanmar and the rest of Southeast Asia.
- Sino-Indian trade will grow but China will maintain political pressure on the border and other issues. A significant military incursion in the Tawang area is quite possible. Rapid economic growth and adequate defence preparedness will remain the best antidotes to such pressures.
In other words, 2011 will be another interesting year. May it be happy and healthy for you all, dear readers!
The author is honorary professor at ICRIER and former chief economic adviser to the Government of India. The views expressed are personal