The International Monetary Fund (IMF) has sharply lowered India’s growth forecast for FY23 to 7.4%, in its World Economic Outlook update titled ‘Gloomy and More Uncertain.
Why did the IMF lower the growth forecast?
The IMF now projects India’s gross domestic product to expand by 7.4% in 2022-23, compared to 8.2% it had estimated in April. It cites less favourable external conditions and more rapid policy tightening for the downgrade. The external shocks cited include tighter financial conditions amid higher-than-expected global inflation, a worse-than anticipated slowdown in China, and negative spillovers from the war in Ukraine. It attributed the 0.8 percentage points negative revision for ‘emerging and developing Asia’ grouping mainly to the sharp slowdown of China’s economy and slowing growth in India.
How will the external shocks impact India?
The IMF estimates global trade growth in 2022 and 2023 to slow by more than previously expected, reflecting the decline in global demand, and supply chain problems. This may impact India’s exports, which had touched a record $420 billion in 2021-22. IMF has recommended further monetary policy tightening, since high inflation may impact private investment and economic growth prospects. That may mean that the government will have to keep up spending, especially for capital creation. This, along with the high subsidy bill, may put upward pressure on the fiscal deficit going forward.
What is the growth outlook going forward?
The IMF has also cut India’s forecast for 2023-24 by 0.8 percentage points to 6.1%, citing several risks to growth. According to the IMF, the outlook for global economy is gloomier and more uncertain. The risks to the outlook are overwhelmingly tilted to the downside. These include higher energy prices, stubbornly high inflation and a persisting slowdown in China.
What policy steps does IMF recommend?
The IMF has made a strong case for policy tightening, as inflation impacts consumption and living standards. While it said that a tighter policy will have economic costs, it added that a delay will only worsen them. Economists estimate the repo rate to peak at 6.5% around mid-2023. India’s retail inflation is hovering at a historic high of over 7%, but it is expected to ease with commodity prices starting to moderate. Inflation numbers have now been above the upper limit of RBI’s tolerance band of 2-6% for sixth straight months.
What about growth estimates by others?
IMF’s India forecast is among the most optimistic ones so far. The RBI has projected economy’s growth for 2022-23 at 7.2%, while the Asian Development Bank last week lowered the forecast for India to 7.2% from 7.5%. Morgan Stanley has also pegged India’s GDP growth at 7.2%. Despite the growth forecast downgrade, India will remain one of the fastest growing key economies in the world in FY23 and FY24, with China’s growth estimated to slow to 3.3% in 2022 and the US to 2.2%, according to the IMF.
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