IMF trims India's growth forecast to 6.7%

China to pip India for fastest-growing major economy tag

The International  Monetary Fund (IMF) has raised its projection for economic growth of major economies, but it drastically scaled down the one for India by 0.5 percentage points to a four-year low of 6.7 per cent for 2017-18 due to demonetisation and the goods and services tax (GST). At this rate, India will lose the tag of the fastest-growing major economy, to be pipped by China, which is projected to grow by 6.8 per cent in 2017.

India’s economy grew 5.7 per cent in the first quarter of the year, which means that the economy has to roughly grow at over 7 per cent in the next three quarters to even achieve the growth rate the IMF had predicted for the entire 2017-18. The cut from the earlier forecast of 7.2 per cent was the sharpest among the multilateral agencies. The World Bank reduced its estimate to 7 per cent from 7.2 per cent earlier and the Asian Development Bank to 7 per cent from 7.4 per cent. 

Among the countries whose growth forecasts have been cut compared to the previous projections are Sub-Saharan Africa and South Africa. 

In its World Economic Outlook released on the occasion of the Fund-Bank annual meeting in Washington, the IMF said, “The growth projection for 2017-18 has been revised down to 6.7 per cent, reflecting still lingering disruptions associated with the currency exchange initiative introduced in November 2016, as well as transition costs related to the launch of the GST in July 2017.” 

Though 6.7 per cent will be the lowest rate of growth in the four-year rule of the Narendra Modi government, it would still be higher than those in the last two years of the previous United Progressive Alliance regime (see table).  These are the only six years which are comparable, according to the revised methodology of calculating gross domestic product (GDP) with 2011-12 as the base year, against 2004-05 that was used previously. 

The IMF also cut the growth rate for India to 7.4 per cent for the next financial year from 7.7 per cent projected earlier. Though the GST is likely to take a toll on GDP growth in the short term, the tax reform along with other initiatives of the National Democratic Alliance government will raise India’s growth rate to more than 8 per cent in the medium term, the IMF said. 

Globally, the IMF said the pickup in growth projected in the April 2017 report is strengthening. The global growth forecast for 2017 and 2018 — 3.6 per cent and 3.7 per cent, respectively — is 0.1 percentage point higher in both years than the earlier forecasts. 

A notable pickup in investment, trade, and industrial production, coupled with strengthening business and consumer confidence, are supporting the recovery. With growth outcomes in the first half of 2017 generally stronger than expected, upward revisions to growth are broad-based, including for the Eurozone, Japan, China, emerging Europe and Russia, the IMF said.

These more than offset downward revisions for some countries such as India.

Though India would grow a tad lower than China, GDP in the neighbouring nation in 2016 exceeded the combined economies of the next largest 12 emerging markets and developing economies, including India, Brazil, Russia and Mexico.

The IMF said inflation is weak in India and Brazil due to an one-off drop in food price inflation in June and high excess capacity after two years of recession. 

Disinflation has been more rapid than expected in some countries, such as Brazil, India, and Russia, which has allowed monetary policy easing in recent months, the IMF said. 

However, since then the retail price inflation has risen in July and August in India. The Consumer Price Index-based inflation rose from 1.46 per cent in June to 2.36 per cent in July and then further to 3.36 per cent in August. The IMF projected average inflation to ease from 4.5 per cent in 2016-17 to 3.8 per cent in 2017-18.

The IMF said the projected level of monetary policy interest rates is somewhat lower than what was forecast earlier. 

It said simplifying and easing labour market regulations and land acquisition procedures are long-standing requirements for improving the business climate in India.

It cautioned that growth rates in China and India do not foretell matching gains in income for the majority of the population. 

In China and India, real per capita GDP grew by 9.6 per cent and 4.9 per cent a year, respectively, during 1993-2007, but the median household income is estimated to have grown less — by 7.3 per cent a year in China and only 1.5 per cent a year in India, it pointed out.