IMF slashes India's FY20 GDP growth forecast to 6.1%, global to 3%

Topics IMF | GDP growth | global growth

The International  Monetary Fund (IMF) on Tuesday cut its projections for India’s growth to 6.1 per cent for 2019-20 from its earlier forecast of 7 per cent as demand is being pulled down by ailing non-banking financial companies (NBFCs) among other factors.

“In India, growth softened in 2019 as corporate and environmental regulatory uncertainty, together with concerns about the health of the nonbank financial sector, weighed on demand,” the IMF said in its much-awaited World Economic Outlook, titled Global Manufacturing Downturn, Rising Trade Barriers. The forecast is in line with the Reserve Bank of India’s, but is higher than that of the World Bank and the Organisation for Economic Co-operation and Development.

The report — released ahead of a three-day annual meeting of the IMF and the World Bank group, which will be held from October 18 in Washington DC — saw the lagged effect of corporation tax rate cut on economic growth, and advised India to go for further reforms including those related to hire and fire, tricky land issues and reduced role of public sector banks in the financial markets.

The multi-lateral agency estimated the economic growth to recover to 7 per cent in the financial year 2020-21 (FY21), though the pace was still lower than its earlier prediction of 7.2 per cent.

It said the global economy is in a synchronised slowdown, with growth for 2019 downgraded again — to 3 per cent, its slowest pace since the global financial crisis. Earlier, the world economic growth for the year was pegged at 3.2 per cent by the IMF. “This is a serious climb down from 3.8 per cent in 2017, when the world was in a synchronised upswing. This subdued growth is a consequence of rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors,” the IMF said.

Global growth in 2020 is projected to improve modestly to 3.4 per cent, a downward revision of 0.1 percentage points from its earlier estimates. 

Gita Gopinath, chief economist at the IMF, said in her blog that the uptick in the global economy in 2020 would be driven by India and other emerging market economies which are projected to experience a growth rebound to 4.6 per cent.

About half of this rebound is driven by recoveries or shallower recessions in stressed emerging markets, such as Argentina, Iran, and Turkey, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia. 

“There is, however, considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020,” Gopinath said in the blog The World Economy: Synchronized Slowdown, Precarious Outlook.

The IMF said India’s economy decelerated further in the second quarter, held back by sector-specific weaknesses in automobile and real estate as well as lingering uncertainty about the health of NBFCs. It said the downward revision for economic growth during FY20 for India reflects a weaker-than-expected outlook for domestic demand. 

Growth will be supported by the lagged effects of monetary policy easing, a reduction in corporation income tax rates, recent measures to address corporate and environmental regulatory uncertainty, and government programmes to support the rural consumption, it said.

The monetary policy and broad-based structural reforms should be used to address cyclical weakness and strengthen confidence in India, it said.

A credible fiscal consolidation path is needed to bring down India’s elevated public debt over the medium term. “This should be supported by subsidy-spending rationalisation and tax-base enhancing measures.”  

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