IMF team pegs FY13 India growth at 5.4%

Staff writers of the International Monetary Fund (IMF) have estimated India’s economic growth this financial year at a 10-year low of 5.4 per cent. For 2013-14, they pegged growth at six per cent. However, India has said the projection for 2013-14 is too conservative.

The projections, part of a report prepared by an IMF team, followed discussions on economic development and policies with Indian officials. The report was released today under Article IV of the IMF’s articles of agreement.

While the finance ministry is confident of reining in the Centre’s fiscal deficit at 5.3 per cent of gross domestic product (GDP) in 2012-13, the IMF staff said this target was likely to be surpassed by 0.3 percentage points. India’s representative to the IMF executive board, Rakesh Mohan, reiterated the ministry’s commitment to fiscal deficit would be restricted to 5.3 per cent.

Mohan said strong global headwinds such as tension in the Euro area and the persistent slowdown in global growth had impacted the economy significantly. “Various lead indicators suggest the slowdown has bottomed out and growth prospects from here should only improve,” he said.

The IMF team projected Wholesale Price Index-based inflation at 7.8 per cent by March and 7.2 per cent by March 2014. Last month, the Reserve Bank of India had lowered its projection for inflation from 7.5 per cent to 6.8 per cent for March.

For deceleration in India’s growth, the IMF team blamed policy uncertainty, including the “high profile” tax announcements in Budget 2012-13, delayed project approvals and supply bottlenecks, particularly in the mining and power sectors. Two announcements in Budget 2012-13---retrospective amendments to the Income Tax Act and the General Anti Avoidance Rules are being reviewed by the government.

The growth projections could be lowered further if the balance sheets of companies and banks deteriorated, the IMF team warned. Other risks included downgrade of sovereign rating by credit rating agencies, a major global financial shock, a rise in global oil prices, insufficient follow-through on recent reforms and an expansionary fiscal policy, the IMF team said.

It added going beyond announced reforms or legislative progress, especially a comprehensive subsidy reform, the Goods and Services Tax and resolving land acquisition issues would lead to higher growth.

The growth estimate of 5.4 per cent for this financial year is a percentage point less than the central bank’s projection and three percentage points lower than the finance minister’s projection. Recently, the finance minister had projected the economy to grow six to seven per cent in 2013-14.

The IMF team said high commodity prices would lead to more people falling into poverty. “A 10 per cent increase in relative food prices would put more than 50 million below the poverty line. As poor households spend more on food, their purchasing power would be eroded more,” it said.

The report projected India’s current account deficit (CAD) to narrow to 3.9 per cent of GDP this year, aided by falling gold imports, a weaker rupee, and broadly stable oil prices. However, while the report was prepared by December 21, recent data on CAD, released on December 31, showed CAD rose to a record 5.4 per cent in the quarter ended September, against 4.2 per cent in the year-ago period.

“The scope for lower policy rates and wider fiscal deficits to cushion the blow of a potential shock is small. Likewise, a boost in public banks’ credit, as in the aftermath of the global financial crisis, is inadvisable, given the outlook for NPAs (non-performing assets),” the report said.