Indian economy is in a “fairly good shape” and it is likely to be less affected than other emerging economies if there is a further shock to the global economy, according to a senior official of the IMF.
“We’ve seen pretty tepid global growth rates in the recent past. If there’s any adverse shock to the global growth and thereby global demand, we think India will not be unaffected but will be less affected than other countries which rely on exports and trade far more than India does,” Paul A Cashin, Assistant Director in IMF’s Asia & Pacific Department, and mission chief of India, told PTI.
“Until demonetisation there was very healthy consumption spending in India, which was basically propelling economic growth. India has an inward domestically demand-oriented economy, which is good when global growth factors are not exactly healthy,” he said.
“That’s why we think India will be, I’m not going to say immune, but less affected than other emerging economies if there’s a further shock to the global economy, including a general global slowdown,” Cashin said.
The International Monetary Fund this week in its annual report on India, had projected the growth to slow to 6.6 per cent in 2016-17 fiscal due to “temporary disruptions” caused by the demonetisation of high-value currency notes in November.
It, however, said demonetisation would have only a short-term impact on the economy and it would bounce back to its expected growth of more than 8 per cent in the next few years.
The near-term adverse economic impact of accompanying cash shortages remains difficult to gauge, while it may have a positive economic impact in the medium term, it added.
Cashin said the IMF is “fairly pleased” with what India has done, certainly over the last couple of years. “They’re in a much better fiscal position than they were, much better in terms of their monetary framework and monetary policy.”
“The external sector seems to be quite under control these days. Just on the inflation side, because of these eruptions in food prices which happen from time to time, now that they have formal inflation targeting, they need to properly implement a monetary stance to achieve their inflation targets,” he said.
“Once the short-term dislocation to consumption from demonetisation passes, there’ll be a little bit of a growth downturn this fiscal year, including the first quarter of the upcoming fiscal year. But after that, India should resume its previous above eight percent growth path in the medium term,” Cashin said.
In its annual report, the IMF said in the absence of disruptive global financial volatility, slower growth in China, Europe and the United States would have only modest adverse spillovers to India, given weak trade linkages.
“On the external side, despite the reduced imbalances and strengthened reserve buffers, the impact from global financial market volatility could be disruptive, including from US monetary policy normalisation or weaker-than-expected global growth,” it said.