The International Monetary Fund believes the Asia & Pacific region is at the risk of facing higher inflation and lower growth on the back of the ongoing war between Israel and the Hamas.

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In an exclusive chat with CNBC-TV18, IMF Director for Asia and the Pacific region, Krishna Srinivasan, said that while the IMF was still evaluating the impact of the recent Israel-Hamas conflict, one potential channel through which the Asia and Pacific region might be affected was an increase in oil prices.

"A 10% increase in oil prices could lead to a 0.15% reduction in global GDP the following year and a 0.4 percentage point increase in inflation… the impact of rising inflation is expected to be higher in Asia, given its status as an oil-importing region," Srinivasan said.

The sharper the rise in oil prices, the more severe the impact could be, he added.

In its latest release on the regional economic outlook for Asia and the Pacific, the IMF says that economic activity in the region remains on track to contribute around two-thirds of global growth in 2023, despite a challenging global environment.

Growth for the region is projected at 4.6% in 2023 and thereafter, moderate to 4.2% in 2024, with risks tilted to the downside. China and India are projected to contribute jointly to about half of world growth in both 2023 and 2024.

The fund had forecast a GDP growth rate of 6.3% for both FY24 and FY25. In its last World Economic Outlook update, IMF had revised India’s FY24 GDP growth estimates up by 20 basis points, due to “resilient domestic demand and strong investment inflows.”

When asked when India would outpace China and become the largest contributor to global growth at the current rates, Srinivasan said India's contribution to global growth is expected to increase to 18% from 16% over the next five years. He expects China to maintain a growth rate higher than the global average for the next five years as well.

Higher-for-longer rates

Srinivasan said the Asia-Pacific's share of global debt had increased to 40% currently from 25% pre-global financial crisis.

“A prolonged period of higher interest rates implies that borrowing costs will rise, putting pressure on debt servicing. The impact will vary depending on the size of each country's balance sheet,” he said.

He believes India, with its reduced non-performing assets (NPAs) and strong financial buffers, is currently in a favourable position. However, he cautioned that as interest rates continue to rise, there could be stress due to the inability of corporates to repay their debt, potentially impacting the financial sector. India should carefully monitor these developments, he warned.

Impact of rising protectionism and the "China+1" strategy

Srinivasan also highlighted the growing risks of fragmentation, friend-shoring, and re-shoring in the global economy. Friend-shoring refers to countries increasing trade with alliance partners while re-shoring entails a more inward-looking approach.

“Both scenarios have the potential to reduce global GDP, with a 1.5% reduction in the case of friend-shoring and a 4.5% reduction in the case of re-shoring. While some countries might benefit from trade diversion in the short term, the long-term effects could lead to reduced global demand,” Srinivasan said, highlighting the importance of mitigating these risks.

Asked if India would necessarily benefit from the China+1 strategy, Srinivasan said that any fundamental shift in global supply chains will take time, but there are some signs of trade and investment diversifying into other countries. This shift, however, is expected to be gradual. To benefit from the "China+1" strategy, countries would need to undertake deep structural reforms that make them more attractive for both investment and trade.

India’s PLI and import ban strategy

While it was too early to make an assessment of how impactful India’s production-linked incentive (PLI) scheme is in terms of getting investments and generating jobs, Srinivasan said that one area where India has shone really brightly is the whole issue of digitalisation, and creating digital public infrastructure.

“Given the impressive strides India has made in that context (digital public infrastructure), limiting imports of laptops and IT equipment is not the right way to go,” cautioned Srinivasan. “If India wants to reach its potential, it has to do much more to eliminate these restrictions,” he said.

For more details, watch the accompanying video.

(Edited by : Shweta Mungre)

First Published:Oct 19, 2023 1:37 PM IST