IMF Cuts India’s Growth Forecast
The IMF has pared its growth numbers for India by 20 basis points and believes that there is little headroom left if the country doesn't seek innovative ways to spur growth
The International Monetary Fund has again cut India’s growth forecast for the current financial year to 5.9% from 6.1% and in parallel made it known that the global economic scenario could just get more bleak as the Russia-Ukraine conflict, growing inflation and tightening monetary conditions continues over the next few months.
In its World Economic Outlook, the IMF pointed out that over the medium term, the prospects for growth seem dimmer than in decades. It lowered the global growth forecast for 2023 to 2.8% from 2.9% estimated earlier and sharply lower than the 3.4% expansion it achieved in 2022. The IMF also projected India’s inflation to decline to 4.9% in FY24 and 4.4% in FY25.
Barely a week ago, the World Bank and the Asian Development Bank had reduced India’s growth forecast for FY24 to 6.3% and 6.4% respectively. At the same time, the RBI’s Monetary Policy Committee had bumped up its own forecast to 6.5% for the current financial year as against its earlier projection of 6.4%.
India may be losing headroom for growth
Amidst all these claims and counter-claims on economic growth prospects, IMF chief economist Pierre-Olivier Gourinchas holds the view that projections for FY24 may see a slight slowdown from last year’s levels of 6.8% to the latest prediction of 5.9%. In an interview published in ET, the official said post the slowdown there is an expected rebound to 6.3%.
Gourinchas said the latest downward projection was based on revised data that the IMF had received from the previous years, which now seems to suggest that the output gap for India is much less than what was earlier assumed. India is closer to its potential, which means there is less headroom to grow, he warned.
Social and public infrastructure spends are key
The official also noted that consumption was also softening in recent times, which means the key to long-term growth could be to find ways to unlock more potential out there. Gourinchas reiterated the need for more investments in infrastructure and innovations to boost growth that also includes strengthening public health, education and growing the female workforce.
“These different aspects, which are sort of long-standing drivers of growth but also long- standing areas of development for a country like India, are still on the table. The number of the initiatives that are in place are actually going in that direction…in particular, on infrastructure investment, for instance,” the official said in the interview.
Dollar-denomination to continue for some more time
On the question of dollar-denominated trade and India’s recent tryst with rupee-trade over oil imports, the IMF official said, overall this wasn’t making much of an impact to the international monetary system or the way it has been organized. The world continues to trade in dollars and how individual countries facilitate trade with specific partners remains their prerogative.
Gourinchas said there is no harm if countries seeking to facilitate trade with specific other countries have arrangements that rely on local currencies that would not involve the dollar if it is in the interest of all the parties. While this may not change the overall trade architecture dominated by the dollar, it is just another way that trade can be conducted.
The official also reminded us that the dollar isn’t just used for trade invoicing but also for large scale borrowings. There is the dollar debt and central banks want to measure the movements of their own currency against the US greenback. He was however confident that in the long term there will be a more balanced world with more reserve currencies than just the US dollar.
