[op-ed snap] The world is still flat


  1. The IMF sees world economic growth accelerating from 3.1% in 2016 to 3.5% in 2017, and 3.6% in 2018
  2. Both advanced and emerging economies are poised to do better
  3. Growth in advanced economies is projected to rise from 1.7% in 2016 to 2% in 2017 and 2018
  4. Emerging markets will grow at 4.5% in 2017, and 4.8% in 2018, compared with growth of 4.1% in 2016
  5. China will see growth decelerating from 6.7% in 2016 to 6.6% and 6.2% in 2017 and 2018, respectively
  6. India’s growth, in contrast, will accelerate from 6.8% in 2016 to 7.2% and 7.7% over the next two years

Years of secular stagnation:

  1. In 1999-2008, the world economy grew at 4.2%, with emerging markets firing away at 6.2%
  2. But the IMF’s projections do hold out the hope that the world economy may emerge from the prolonged slump it has seen consequent to the financial crisis of 2007
  3. Many economists believe that the world economy was in the grip of ‘secular stagnation’, an expression coined by the economist Alvin Hansen in the 1930s
  4. Hansen argued that where savings substantially exceed investment, the real interest rate tends to drop to a very low level
  5. Conventional monetary policy operates by reducing nominal interest rates in order to stimulate growth
  6. Where the nominal interest rate is already close to zero, there isn’t much scope for cutting interest rates
  7. In conditions of ‘secular stagnation’, conventional monetary policy is doomed to be ineffective
  8. The burden of reviving growth in such a situation falls on fiscal policy
  9. This means running up large government deficits and increasing public debt
  10. But markets will finance government borrowings only up to a point, and there is also resistance among policymakers to increased government spending

Description of the world economy in recent years:

  1. Economists underlined that the real interest rate had indeed been falling for several years
  2. This was because savings were rising and investment was falling
  3. Higher savings flowed from factors such as greater inequality (the rich can spend only so much), and greater life expectancy and reduced post-retirement benefits (which means people have to save more to provide for retirement)
  4. Investment had fallen because capital goods had become cheaper, the new economy did not require a great deal of capital and population growth had slowed (which meant lower demand for goods down the road)
  5. With decreased spending, inflation rates also fell in the advanced world

Winds of recovery?

  1. In recent months, inflation is trending upwards
  2. The IMF expects the inflation rate in the U.S. to rise from 1.3% in 2016 to 2.7% in 2017
  3. In the Euro area, it sees inflation rising from 0.2% to 1.7%
  4. The spectre of a deflationary spiral has thus been dispelled
  5. The stock markets have soared consequent to the election of Donald Trump as U.S. President, and household debt is once again rising in the advanced world
  6. We cannot be certain, therefore, that the projected acceleration in growth in the medium term is based on a solid recovery
  7. The IMF warns that high income inequality is likely to persist. This means that an important cause of ‘secular stagnation’ will remain unaddressed

All eyes on the U.S.:

  1. Much boost to market sentiment has to do with expectations that the U.S. will see a strong fiscal stimulus through the combination of tax cuts and massive infrastructure spending that Mr. Trump promised during his election campaign
  2. The IMF suggests that the U.S. policy agenda could unfold in ways that could derail its forecasts
  3. A wider fiscal deficit could have either of two outcomes: It could cause output to rise while leading to a moderate rise in interest rates
  4. Or it could cause a sharp rise in interest rates without any significant increase in output
  5. The world economy would benefit in the first scenario but not in the second

Dip for emerging economies:

  1. The IMF warns that emerging markets, including India, will find the external conditions for growth less supportive than in the post-2000 period thus far
  2. Slower growth in the developed world means lesser demand for emerging market goods and services
  3. Tightening monetary conditions in the advanced world spell lower capital flows
  4. Subdued commodity prices mean that terms of trade improvements will be limited
  5. Emerging markets accounted for 70% of global growth in purchasing power parity terms in 2000-08, nearly double their contribution in the 1980s
  6. With external conditions now turning adverse, the IMF sees the contribution of emerging markets and developing economies (EMDEs) to global growth in 2016-21 falling
  7. The fall is quite small but it may mark the reversal of a benign trend

Global scenario:

  1. China faces the problem of a large expansion in credit which has sustained growth in recent years
  2. India is wrestling with a huge debt overhang
  3. Excessive debt in many parts of the world could undermine the IMF’s upbeat forecasts
  4. The threat of protectionism and anti-globalisation sentiments in the U.S. and Europe pose bigger risks than many of the factors mentioned above
  5. Finally, there are rising geopolitical tensions. U.S.-Russia relations have touched a new low
  6. There is a real prospect of confrontation between the U.S. and Russia over the conflict in Syria
  7. Tensions over North Korea have reached a flashpoint
  8. The U.S. and China are at loggerheads over maritime rights in the South China Sea


Read the op-ed to develop understanding of the changing world economic scenario and IMF’s forecast on the economic perspective.

[op-ed snap] A call for reform: On IMF’s quota system


  1. Finance Minister Arun Jaitley has demanded reforms to the International Monetary Fund’s controversial quota system, shedding light on the problems facing the Bretton Woods institution in today’s global economy


  1. Quotas determine the size of contingency funds at the disposal of the IMF to lend to countries in need of help
  2. It also determines the power of individual countries to influence lending decisions and tap into the funds themselves
  3. Though developing countries hold less than half the overall quota at the moment, with their rapidly increasing economic heft they have demanded a greater share — with limited success

General Review of Quotas:

  1. Speaking at the spring meetings of the IMF, Mr. Jaitley reiterated the need to reform the quota system further
  2. Else, he warned, the legitimacy and credibility of the IMF could be eroded
  3. 15th General Review of Quotas (GRQ), the most recent attempt to revise the size and composition of the system, was to be completed by October 2017, but the deadline has now been extended to 2019
  4. The delay was not unexpected, given the poor precedent set by the long delay in adoption in 2016 of the previous GRQ
  5. With the rise of competing global institutions ready to meet the capital needs of the developing world, the patience of countries such as India may be tested more easily


  1. At stake is the potency of the IMF in keeping up with the changed fundamental needs of developing economies
  2. The developing world is looking beyond the short-term crisis management tools that the IMF, as the sole international lender of last resort, has traditionally offered them for decades now
  3. China, for instance, with its steadily rising influence on the global economy, has grown to be the focal point for economies seeking alternative sources of capital to fund their long-term growth needs
  4. This month, Mr. Jaitley announced that India is seeking $2 billion from the New Development Bank, set up by the BRICS countries in 2015 with a more equitable power structure, to fund infrastructure projects
  5. The Asian Infrastructure Investment Bank, launched in 2014, could be an even bigger threat to the IMF’s influence given its larger membership, lending capacity and international reach


  1. In this environment of competition, the IMF will have to do more than just superficially tinker with its asymmetric power structure and outdated quota system
  2. Else, it could be slowly but steadily pushed into irrelevance


What is an Extended Fund Facility (EFF)?

  1. The IMF can assist a country with the adjustment process under an Extended Fund Facility (EFF)
  2. When? A country faces serious medium-term balance of payments problems because of structural weaknesses that require time to address
  3. Assistance under EFF features longer program engagement—to help countries implement medium-term structural reforms—and a longer repayment period

IMF to disburse $102 million to Pakistan- II

  1. India: Did not oppose the decision since the amount involved is not large
  2. This is despite the rising hostilities between the two neighbours which has led India to strive to isolate Pakistan globally through diplomatic efforts
  3. A Factoid: India’s IMF Executive Director in Washington Subir Gokarn also represents Bangladesh, Bhutan and Nepal but not Pakistan, which is in the group that has Iran and other countries

Indian demands at Bretton Woods meeting

  1. Context: The ‘Spring Meetings’ interaction with various officials of the International Monetary Fund and the World Bank
  2. Financing: Jaitley has called on the World Bank to continue its concessional financing until 2030
  3. He also called for increase the development financing and non- concessional loans to $100 billion over the next five years
  4. Why? Delivering the SDGs on development and reconstruction agenda would require large amounts of concessional and non-concessional finance
  5. The ongoing revision of environmental and social standards required under the financing conditions must not compromise the primacy of the development objective

Stick to fiscal consolidation: WEO

  1. Context: Latest edition of the World Economic Outlook (WEO) by International Monetary Fund (IMF)
  2. India must continue on its fiscal consolidation path and focus on reforms, especially in the labour and infrastructure sectors
  3. Consumer inflation would be at 5.3% for the next two years and would ease by 2021
  4. Lower commodity prices, supply side measures, and a relatively tight monetary stance have resulted in a faster-than-expected fall in inflation
  5. But upside risks to inflation could necessitate a tightening of monetary policy

Lagarde lauds India’s Fiscal policy

  1. Context: At a 3-day Advancing Asia conference hosted by India and the IMF, IMF MD Christine Lagarde lauded India
  2. What? India’s fiscal stance of consolidation and higher capital spending is “appropriate and sensible”
  3. Investments in major infrastructure projects are the right way to stimulate economy
  4. Also the effort by Govt & RBI to clean bank balance sheets are appropriate

IMF and India to Set up a South Asia Regional Training and Technical Assistance Center(SARTTC)

  1. Context: Union Finance Ministry and International Monetary Fund (IMF) have signed a Memorandum of Understanding (MoU) on SARTTC
  2. Objective: SARTTC will set up for enhancing capacity development and training officials in dealing with macro-economic and financial issues in South Asia region
  3. Relevance: Will become the focal point for planning, coordinating, and implementing the IMF’s capacity development activities in the region on a wide range of areas
  4. Focus Areas: Macroeconomic and fiscal management, financial sector regulation, monetary operations and supervision, and macroeconomic statistics
  5. Help to address existing training needs and respond to the demand for IMF training in India, Bhutan, Bangladesh, Nepal, Maldives and Sri Lanka

Yet to receive a request from Cuba for IMF membership: IMF chief

  1. News: Cuba has not yet made a request for membership of the IMF, the fund’s chief said
  2. Context: IMF chief’s comments came just days after European Union(EU) and Cuba signed an agreement in Havana to establish normal relations
  3. Why? For bringing Communist-run island further into the international fold and paving the way for full economic cooperation with the 28-member bloc
  4. Relevance: Cuba was one of the founding members of the IMF until it quit in 1964

IMF prods India on GDP numbers

  1. Context: IMF came to the rescue of CSO amid consistent criticism of new GDP numbers
  2. It held that the country’s economic growth figures look credible
  3. It also prodded CSO to come out with the producer’s price index (PPI) in place of retail and wholesale price indices
  4. Critics: New GDP series portrays an overly robust picture of the Indian economy
  5. But other macro indicators such as bank credit growth, rural demand and factory output do not support it

IMF knowledge sharing centre to come up in India

  1. Context: IMF will set up a knowledge-sharing centre in India
  2. Objective: To counsel Delhi and other South Asian capitals, bringing more expertise in an economic crisis
  3. It is a first such office for Asia
  4. Countries: Will provide assistance to India, Nepal, Bangladesh, Sri Lanka, Pakistan and Bhutan
  5. Benefit: Will ensure better understanding of regional concerns- trade, agriculture, climate change, facilitating a reform process and support to regional integration

3 red flags from IMF

  1. Context: A study conducted by IMF on Indian firms
  2. Relevance: Leverage of Indian firms is among the weakest in emerging markets
  3. How? Following the global financial crisis, firms couldn’t raise money from new share issuances and instead relied increasingly on foreign borrowings, that made them vulnerable to external shocks
  4. Returns declined sharply: Because of delay in project approvals, land acquisition problems, fuel scarcity, 2 yrs of droughts, weak domestic and export demand, excess capacity, high interest rates
  5. Vulnerability to shocks is high: Capacity of firms to repay debt has fallen alarmingly

Christine Lagarde appointed for second term as IMF chief

  1. Context: She was sole candidate nominated for the post and was re-nominated by IMF’s Executive Board decision taken by consensus
  2. Background: She was for the first time appointed MD in 2011 after IMF Board had initiated selection process on merit-based and transparent process
  3. Prior to her appointment at the IMF in 2011, she had served as Minister of Finance and Minister for Foreign Trade of France
  4. Significance: First woman named to the top post of IMF since the institution’s inception in 1944

Let’s know more about IMF Quota

  1. It determines a country’s subscription to the IMF, access to fund and voting rights.
  2. The current quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
  3. GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 percent)—and on PPP exchange rates (40 percent)
  4. Emerging economies want changes to the formula as part of overall reform, giving more weight to GDP at PPP and dynamic factors such as GDP growth.
  5. Any changes in quotas must be approved by an 85 percent majority of the total voting power.
  6. This gives country holding >15% quota de facto veto over quota reforms and USA holds such a veto with more than 16% quota share.

Keep Pushing for IMF reform

Launch of BRICS Bank and Asian Infrastructure Investment Bank, finally pushed US and developed nations to modernize their quota structure.

  1. International Monetary Fund has finally made country quota reforms agreed by the G20 in 2010 a reality.
  2. The U.S. Congress which had blocked the reforms finally dropped its veto to allow quota reform to go through.
  3. With this structural shift, more than 6 % of the quota, including both the Fund’s capital and voting rights, have been transferred from developed to emerging economies.
  4. India and China have respectively increased their voting shares by 0.292 and 2.265 percentage points.
  5. All the directors on IMF board will now be elected and developed countries will not be able to nominate.

Let’s know about IMF?

  1. Created in 1945, the IMF is governed by and accountable to 188 countries that make up its near-global membership.
  2. The IMF, also known as the Fund, was conceived at a UN conference in Bretton Woods, New Hampshire, United States, in July 1944.
  3. To foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and reduce poverty around the world.
  4. The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.

India gets more voting rights in IMF reforms

More than 6 per cent of the quota shares will shift to emerging and developing countries from the U.S. and European countries.

  1. India’s voting rights increase to 2.6 per cent from the current 2.3 per cent, and China’s, to 6 per cent from 3.8, as per the new division.
  2. Russia and Brazil are the other two countries that gain from the reforms.
  3. The significant resource enhancement will fortify the IMF’s ability to respond to crises more effectively.
  4. IMF reforms were agreed upon by its 188 members in 2010, in the aftermath of the global financial meltdown.
  5. The reforms bring India and Brazil into the list of the top 10 members of IMF, along with the U.S, Japan, France, Germany, Italy, the United Kingdom, China and Russia.

:( We are working on most probable questions. Do check back this section.

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