IMF retains India's FY20 GDP growth rate forecast at 6.1%

The International Monetary Fund (IMF) has retained India’s economic growth forecast at 6.1 per cent for FY20, but said risks to the outlook are tilted to downward side.

IMF’s projection, given in its much-awaited country report on India under Article IV of the Fund, is much higher than those by most agencies. For example, the Reserve Bank of India’s latest projection pegged the growth at 5 per cent, Standard & Poor’s at 5.1 per cent, Moody’s at 4.9 per cent and Fitch’ at 4.6 per cent for the current financial year.

IMF factored in gross domestic product (GDP) growth rate of 5 per cent in the first quarter of FY20. After that, growth fell further to 4.5 per cent in the second quarter of the fiscal year.

IMF Chief Economist Gita Gopinath recently said the Fund would revise downward India’s economic growth when it comes out with its update on world economic outlook in January. As such, this 6.1 per cent growth rate may be cut that time.

“Risks to the outlook are tilted to the downside. Key domestic risks include tax revenue shortfalls and delays in structural reforms. Credit growth could also remain subdued, as there is a perception of increased risk aversion among banks,” the Fund said in its report.

It said implementation of the recently announced consolidation of the public sector banks could divert focus and weigh on near-term credit growth.

The main external risks pertain to higher oil prices, a sharp rise in risk premia in global financial markets, and rising protectionism globally, it said.

The Fund said investment and private consumption were expected to firm in the second half of the fiscal year.

“This is expected to be supported by the lagged effects of monetary policy easing, recent measures to facilitate monetary policy transmission and address corporate and environmental regulatory uncertainty, and government programs to support rural consumption being rolled out,” the report said.

It said over the medium term, growth is projected to gradually rise to its medium-term potential of 7.3 percent.  

This would be due to continued commitment to inflation targeting, gradual macro-financial, and structural reforms, including implementation of reforms initiated earlier, such as the goods and services tax (GST) and the Insolvency and Bankruptcy Code (IBC), as well as ongoing steps to liberalise FDI flows and further improve the ease of doing business, it said.

IMF projected inflation to remain around 3.4 per cent with the effect of subdued demand broadly offsetting dissipating base effects of low food prices.

The current account deficit is projected to narrow marginally to 2 per cent of GDP. The balance of payments would return to surplus, on returning capital inflows thanks to more accommodative global financial conditions, it said.

The rise in protectionism and retreat from multilateralism could affect India directly through the trade channel and indirectly through confidence effects and related effects on financial markets.

While there may be trade diversion toward India from the US-China tariff escalation, the macroeconomic impact is expected to be small given India’s relatively low trade openness and less diversified exports base, it said.

The IMF board noted that India’s rapid economic expansion in recent years has lifted millions of people out of poverty. However, in the first half of 2019, a combination of factors led to subdued economic growth in India. With risks to the outlook tilted to the downside, IMF directors called for continued sound macroeconomic management.

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