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People recognise the risks of global fragmentation and events like Davos are important to avoid it, Gita Gopinath, Deputy Managing Director of International Monetary Fund, said on Tuesday.

In an interview with CNBC TV-18's Shereen Bhan at the World Economic Forum meeting at Davos, Switzerland, she said, "Events like Davos brings together the public sector and the private sector to help prevent such a fragmentation from happening. That said I think the pandemic and the war has made all countries much more concerned about economic security and national security and that's causing them to undertake policies that could lead to greater fragmentation around the world."

"There are very serious costs if this becomes runaway fragmentation and we are decoupling around the world into different economic blocks I mean the cost in terms of what GDP could be, around a loss of seven percent of GDP, which is basically like losing the economies of Germany and Japan on a permanent basis, because that is very costly," she added.

Gopinath said that tightening in monetary policy is one of the reasons to expect global growth to decline this year.

"We will see the effects of those type of monetary policy that usually plays out with the lag. So we would likely see it in labor markets; we will see unemployment rates going up. Now the question is how much will have to go up by you know; the view is that if there is weakness, it will be not substantial but we'll wait and see about that."

Also Read: Davos 2023 | A look at the overwhelming presence of India at the World Economic Forum

Gopinath said that another factor that is affecting the outlook is China because China has moved pretty strongly away from a zero-Covid policy. "We're going to have a couple of months where conditions will be tapped in China but then we expect to see a rebound in China too," she added.

Speaking of India being the bright spot for investors, Gopinath said that India is doing relatively well compared to other economies in the world.

"In terms of our growth numbers, we have 6.8 percent of this fiscal and 6.1 percent for next but again looking ahead, I see a lot of businesses, a lot of companies are looking to India as an investment destination as they try to diversify away from other countries including China. So, this is a good time for India in terms of being able to draw more of the global supply chain towards India."

"India also has G20 presidency so it is very much on the world stage," she said.

She further said that there has been a lot of progress on the physical infrastructure and digital public infrastructure, both of which are making India more attractive as a destination at this point. However, she said, issues like reduced participation of women in labour market need to be addressed in order to make it more resilient and flexible and reduce the youth unemployment rate.

"We still need land reforms in India. That's another area but a lot of action has been taken like I said there's lots of positive sentiment towards India." she added.

She said that people recognise that there is a serious risk and the meeting of US President Joe Biden and Chinese President Xi Jinping last year in November at G20 leader summit is a good sign.

"It's so important for the two largest economies of the world to work together so I do think they're aware of it but I still worry that policies will not necessarily move in the right direction so we are worried about."

Gopinath also said that 2023 is going to be tough year for central banks because they're going to have to make the decision about how long to keep monetary policy restricted.

"Markets are very eager to escape the tight monetary policy environment and based on their expectations you know inflation will come down very quickly. They will start cutting interest rates. I think it's premature to make that conclusion and market policy will have to keep fighting that narrative." she said.

"We have to see what the inflation data brings in but as of now I would I think they would have to keep the US for instance would have to keep interest rates at around 5 through 2023."

Also Read: Davos 2023 | Need more 'he for shes' to hit gender parity, agrees WEF panel

(Edited by : Anushka Sharma, Pradeep John)

First Published:Jan 17, 2023 10:59 PM IST