IMF lowers India’s growth forecast

Syllabus subtopic: Important International institutions, agencies and fora, their structure, mandate.

Prelims and Mains focus: about the IMF report and its significance; about IMF and terms associated to it

News: The International Monetary Fund (IMF) on Monday slashed India’s growth forecast by 1.3 percentage points to 4.8% for 2019-20, prompting the agency to also trim its global growth estimates as a result.

Why?

Growth in India slowed sharply owing to stress in the non-bank financial sector and weak rural income growth.

Background

Finance minister Nirmala Sitharaman, scheduled to present her second budget on 1 February, is expected to increase infrastructure spending and boost rural expenditure to revive growth, which slowed to a six-and-a-half-year low of 4.5% in the quarter ended 30 September.

Contrasting figures

While the Indian government’s statistics department and the Reserve Bank of India (RBI) have estimated growth in 2019-20 at 5%, rating agency Moody’s Investors Service has projected growth at 4.9% for the fiscal.

What did the IMF recommend earlier?

• IMF in its Article IV consultation report on India released last month said the Indian government should avoid a fiscal stimulus to boost the economy and, instead, opt for an easier monetary policy.

• However, retail inflation has picked up since and RBI has paused its monetary easing cycle. Retail inflation touched a five-and-a-half-year high of 7.35% in December, breaching the central bank’s tolerance limit of 6%. This may constrain RBI from not only further monetary easing in its policy review on 6 February, but may also force it to rethink its accommodative policy stance. The IMF growth projection for India shows economic downturn is quite entrenched.

IMF’s ‘World Economic Outlook’ report highlights

• It projected global growth to increase modestly from 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021. The slight downward revision of 0.1 percentage point for 2019 and 2020, and 0.2 percentage point for 2021, is owed largely to downward revisions for India.

• The IMF report, however, projected India’s growth to revive in 2020-21 to 5.8%, 30 basis points below its October estimate, supported by monetary and fiscal stimulus as well as subdued oil prices.

• IMF raised China’s growth estimate by 20 basis points to 6% for 2020, reflecting the signing of the phase I trade deal with the US.

• Despite several headwinds, IMF said some indications have emerged towards the year-end that global growth may be bottoming out. The report, however, warned that downside risks remain prominent, including rising geopolitical tensions, notably between the US and Iran, intensifying social unrest, further worsening of relations between the US and its trading partners and deepening economic friction between other countries.

• The pickup in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico. A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline.

Way ahead

• The economic slowdown seems to be sharper than estimated. This is a wake-up call for the government ahead of its 1 February budget, which is likely to address the economy’s structural weaknesses and recalibrate spending within the available fiscal space. With inflation crossing the central bank’s tolerance limit, the ball is now in the government’s court to revive growth.

• Monetary policy having run its course, the government should spend wisely to support economic recovery.