IMF forecast cuts India’s growth rate

Expecting weaker domestic demand limiting an economic recovery the International Monetary Fund (IMF) has further cut its annual growth forecast for India.

The economy is now expected to expand 7% in the year ending 31 March 2020,  0.3 percentage point slower than IMF’s April projection. In April, the Fund cut India’s growth outlook by 0.2 percentage point to 7.3%. Economic growth is expected to accelerate to 7.2% in the following year.

“The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand,” IMF has said in its update to the World Economic Outlook (WEO).

Gross domestic product growth in the March quarter slowed more than expected to 5.8% from 6.6% in the December quarter. This was the slowest quarterly GDP growth in five years. Annual GDP growth slowed to 6.8% in the year ended 31 March from 7.2% in the previous year.

The broad-based slowdown in consumption and investment demand in India was partly due to uncertainties associated with the just concluded general elections as well as tightening of borrowing conditions for small and medium enterprises, according to IMF chief economist Gita Gopinath.

Economist Gopinath has said global growth is sluggish and precarious, as some of these are self-inflicted. “Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased,” she said.

Since last month, Reserve Bank of India (RBI), the Economic Survey of the Finance Ministry and the Asian Development Bank (ADB) have cut their growth outlook for India to 7%.

Last month, RBI cut policy rates for the third consecutive time by 25 basis points.

With retail inflation at 3.18% in June, most analysts expect RBI to cut interest rates for the fourth consecutive time in its policy review on 7 August.

IMF also revised downward its growth projections for China as well as for the world by 10bps each to 6.2% and 3.2%, respectively for 2019.

“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown,” IMF said.

US-China trade negotiations broke down in May, prompting the US to increase the tariff from 10% to 25% on $200 billion worth of  imports from China. It also threatened tariffs on another $300 billion of Chinese imports. China retaliated by raising tariff rates on $60 billion worth of US imports.

IMF said the recent softening of inflation across emerging markets and developing economies gives central banks the option of becoming accommodative, “especially where output is below potential and inflation expectations are anchored”.

IMF said multilateral and national policy actions are vital to place global growth on a stronger footing.

 

The Indian economy grew 6.6% in the December quarter, the slowest in five quarters. That prompted the Central Statistics Office (CSO) to trim its 2018-19 forecast to 7% in February from 7.2% estimated in the previous month.

 

With the Indian economy projected to slow down further in the fiscal fourth quarter, the central bank’s focus has shifted from inflationary concerns to sustaining the growth momentum.

Of the high-frequency indicators of industry, growth in the manufacturing component of the index of industrial production slowed to 1.3% in January. Growth of eight core industries remained sluggish at 2.1% in February. Data released by the Society of Indian Automobile Manufacturers on Monday signalled a slowdown in urban demand as car sales grew 2.7% in 2018-19, the worst performance in five financial years.

In fact Bajaj Auto Chairman Rahul Bajaj has been quoted in a section of the press as saying “the economy is in a bad shape.”

There is  a cascading effect affecting the auto component industry where one million jobs have been lost due to slowdown in vehicle sales.

Probably these cuts shocked the Prime Minister out of his slumber and he rushed to see former Prime Minister and economist, Dr Manmohan Singh at the latter’s residence on 24 July.

“In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening goods and services tax compliance and further reducing subsidies,” IMF said in its World Economic Outlook.

The report emphasized enhancing governance of public sector banks and reforms to hiring and dismissal regulations that would incentivize job creation and absorb the country’s large demographic dividend. “Efforts should also be enhanced on land reform to facilitate and expedite infrastructure development,” the report stated.

IMF commended the government for taking steps to strengthen financial sector balance sheets through accelerated resolution of non-performing assets (NPAs) under a simplified bankruptcy framework.

Beyond 2020, the report said global growth would be sustained at about 3.6% because of the increase in the relative size of economies such as China and India, which are projected to have robust growth.

 

About TBM 27 Articles
designed and maintained by TBM