IMF cuts India's growth forecast to 6.1 per cent

The International Monetary Fund (IMF) on Tuesday trimmed India’s growth forecast by 90 basic points to 6.1 per cent (100 basis points mean one percentage point). This is second downward revision in seven months and in total 120 basis points reduction.

“The downward revision relative to the April 2019 World Economic Outlook (WEO) of 1.2 percentage points for 2019 and 0.5 percentage point for 2020 reflects a weaker-than-expected outlook for domestic demand. Growth will be supported by the lagged effects of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory.”

The IMF has also cuts global forecast by 20 basis points for 2019. Its Economic Counsellor and Director of the Research Department, Gita Gopinath said that the global economy is in a synchronised slowdown and the fund once again, is downgrading growth for 2019 to 3 per cent, its slowest pace since the global financial crisis. Growth continues to be weakened by rising trade barriers and increasing geopolitical tensions.

“We estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8 per cent by 2020. Growth is also being weighed down by country-specific factors in several emerging market economies, and structural forces—such as low productivity growth and ageing demographics in advanced economies,” she said.

India’s growth story

With GDP’s (Gross Domestic Products) growth rate slipping to multi quarter low of 5 per cent during April-June period, almost all the agencies including the Reserve Bank of India (RBI) lowered the growth projection. Though, second quarter’s (July-September) GDP growth is expected to slide down, all agencies are expecting that growth during second half (October-March) will be better and next fiscal it will improve further. Still, IMF cuts the forecast for 2020 by 20 basis points to 7 per cent.

Now, the big question is what India should do to reverse the slowdown. Here, the IMF has suggested that the monetary policy and broad-based structural reforms should be used to address cyclical weakness and strengthen confidence. 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.

“Governance of public sector banks and the efficiency of their credit allocation needs strengthening, and the public sector’s role in the financial system needs to be reduced. Reforms to hiring and dismissal regulations would help incentivise job creation and absorb the country’s large demographic dividend. Land reforms should also be enhanced to encourage and expedite infrastructure development,” IMF said in its annual publication, ‘World Economic Outlook’ with tag line ‘Global Manufacturing Downturn, Rising Trade Barrirers.’

The report pointed out that for few major economies, including India, Brazil, Mexico, Russia, and South Africa, growth in 2019 is sharply lower than in 2018, also for idiosyncratic reasons, but is expected to recover in 2020. In India, growth softened in 2019 as corporate and environmental regulatory uncertainty, together with concerns about the health of the non-bank financial sector, weighed on demand.

“The strengthening of growth in 2020 and beyond in India as well as for these two groups (which in some cases entails continued contraction, but at a less severe pace) is the driving factor behind the forecast of an eventual global pickup, the report said. Here, the two groups refer to systemic economies comprising the United States (US), euro area, China, and Japan—which together account for close to half of global GDP and the group of emerging market economies.