IMF update cuts India’s 2018, 2019 growth projection but country still world beater in growth rate

Rising crude prices, worrying dollar-rupee exchange rate and monetary tightening due to factors like inflation have impacted India’s growth projections by international agencies.

The International Monetary Fund, in its latest World Economic Outlook update, has slashed India’s growth forecast by 0.1 percentage point or 10 basis points to 7.3 per cent for 2018 and by 0.3 per cent point or 30 basis points to 7.5 per cent for 2019.

This is in comparison to the earlier projection of a 7.4 per cent growth figure in 2018 and 7.8 per cent growth for 2019.

The good news is that despite this cut the April forecast still places India as the fastest growing economy in comparison to the 6.6 per cent in 2018 and 6.4 per cent in 2019 figure for China.

Indian growth story remains a world beater in an election year as the forecast for global growth remains static at 3.9 per cent hit by the profits being made by oil producers at the cost of consuming nations.

On India’s growth projection the IMF update says, “The projection is 0.1 and 0.3 percentage point lower for 2018 and 2019, respectively, than in the April WEO, reflecting negative effects of higher oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher expected inflation.”

The IMF update waters down the cheer the World Bank update had brought last week. It had said that India has emerged as the world’s sixth-largest economy in 2017 with a GDP of $2.59 trillion, walking past France.

But the update will arm the NDA government that pushed two key economic reforms — demonetisation and introduction of Goods and Services Tax as it says “the drags from the currency exchange initiative (note ban) and the introduction of the Goods and Services Tax are fading”.

The IMF says that falling domestic demand due to rising crude prices, worrisome exchange rate and, monetary measures to insulate the economy from higher inflation are taking a toll. The Reserve Bank of India in its monetary policy in June had hiked the repo rate by 25 basis points to 6.25 per cent for the first time in four-and-a half years in anticipation of inflationary risks. This was in the wake of wholesale inflation in India in June touching a 54-month high of 5.77 per cent and India’s crude imports averaging $73.85 a barrel in 2018 compared to $46.56 in the corresponding period last year.

The update says, “Emerging market and developing economies have experienced powerful crosswinds in recent months: rising oil prices, higher yields in the United States, dollar appreciation, trade tensions, and geopolitical conflict. The outlook for regions and individual economies thus varies depending on how these global forces interact with domestic idiosyncratic factors.”

In what can be a difficult prospect for the government in 2019 election, the IMF keeps the flag up for continuing the reforms process and inclusive growth. It says, “To raise potential growth and enhance its inclusiveness, structural reforms remain essential to alleviate infrastructure bottlenecks, strengthen the business environment, upgrade human capital, and ensure access to opportunities for all segments of society.”

The advice to countries like India is to improve resilience by opting for appropriate mix of fiscal, monetary, exchange rate, and prudential policies to reduce vulnerability to tightening global financial conditions, sharp currency movements, and capital flow reversals.

If the Indian banks continue to stay in the red due to mounting non-productive assets (NPAs) the update says, “Long standing advice on the importance of reining in excess credit growth where needed, supporting healthy bank balance sheets, has become even more relevant in the face of renewed market volatility.”

Among the emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals, as per IMF’s update of the flagship World Economic Outlook (WEO).




News credit : Indiatoday

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