The International Monetary Fund (IMF) on Tuesday joined the World Bank, Fitch and the Reserve Bank of India )RBI) in lowering India’s growth forecast for FY23. The IMF expects India to grow at 8.2 per cent in the year, 80 basis points (bps) lower than its January forecast of 9 per cent. It has also projected a growth rate of 6.9 per cent for FY24, which is 20 bps lower than the previous forecast.
“Notable downgrades to the 2022 forecast include Japan (0.9 percentage point) and India (0.8 percentage point), reflecting in part weaker domestic demand — as higher oil prices are expected to weigh on private consumption and investment — and a drag from lower net exports,” IMF said in its annual publication ‘World Economic Outlook (WEO)’ released on the eve of Fund-Bank meeting in the US.
Deteriorating situation
WEO has lowered forecast for global economy, too, in 2022 by 80 bps to 3.6 per cent. “Global economic prospects have worsened significantly since our last WEO forecast in January. At the time, we had projected the global recovery to strengthen from the second quarter of this year after a short-lived impact of the Omicron variant. Since then, the outlook has deteriorated, largely because of Russia’s invasion of Ukraine — causing a tragic humanitarian crisis in eastern Europe — and the sanctions aimed at pressuring Russia to end hostilities,” WEO said.
Further, it said that in the matter of a few weeks, the world has yet again experienced a major, transformative shock. Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the war has created the very real prospect that a large part of the recent gains will be erased. “The long list of challenges calls for commensurate and concerted policy actions at the national and multilateral levels to prevent even worse outcomes and improve economic prospects for all,” it said.
India’s forecast
WEO revision follows what other institutions have done. While RBI has cut the forecast to 7.2 per cent from 7.8 per cent, the World Bank had cut it to 8.7 per cent from 8 per cent. Fitch, too, revised the forecast downwards to 8.5 per cent from 10.8 per cent. S&P has alone retained the forecast at 7.8 per cent. However, all the institutions agree that the Ukraine-Russia conflict has affected India’s economic recovery beside affecting global economy.
In its latest monthly bulletin released on Monday, RBI had said the near-term global outlook appears grim, caught up in a vortex of geopolitical risks materialising rapidly, strained supply chains and the quickening pace of monetary policy normalisation. Emerging market economies are bracing up to contend with swift shifts in risk sentiments and tightening of global financial conditions that could produce real economy consequences which may thwart incipient recoveries or even precipitate rocketing inflation and economic downturns.
The Indian economy is not immune to these negative externalities. The surge in commodity prices is already posing inflation risks, especially through the conduit of surging imports. Rapidly widening trade and current account deficits co-existing with portfolio capital outflows weigh on external sustainability, although the strength of underlying fundamentals and the stock of international reserves provide buffers.
“India faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances and fiscal reprioritisation to spur capital spending on infrastructure. Going forward, spurring private investment remains a key thrust area for sustaining growth on a durable basis,” it had said.