Inflation will not come below RBI's tolerance level in FY23: IMF's Choueiri

India relative bright spot in the world; 6.8 per cent growth rate 'really a good number': Senior executive

A few days after the International Monetary Fund (IMF) cut India’s economic growth by 60 basis points to 6.8 per cent for 2022-23, compared to its earlier forecast of 7.4 per cent, its India Mission Chief Nada Choueiri tells Indivjal Dhasmana that the new growth rate is not bad since emerging market and developing economies are expected to grow by only 3.7 per cent on average in 2022.

She says while rise in interest rates in the West may impact investment flow into India, liberalisation of government security regime for non-residents, digitisation in a number of areas and talks and free trade agreements with other nations and blocs will help India get investments. Edited excerpts from an interview.

The IMF did not cut global economic growth forecast in the latest review compared to the July one, but slashed India's by 60 basis points. Why?

We did not cut global economic growth forecasts but these were changed for many individual countries. Forecasts of some countries declined and those of some others were raised. That is why the global growth forecast was unchanged. For those countries whose growth forecasts declined, they are large trading partners of India, for instance, US, EU and China. Because their growth forecasts declined, the external demand for India's goods declined and hence growth forecasts for India too declined. Decline in growth forecast for India is not entirely due to decline in external demand but also due to tighter financial conditions as the West has raised interest rates quite a bit this year. This has affected investment flows into India and hence there are less opportunities for investments and growth in India than what we were projecting earlier.

IMF had a higher growth projection for India at 7.4 per cent than the monetary policy committee’s (MPC) 7.2 per cent for 2022-23 in its July publication. However, now it is lower than MPC's projection. Any take on this divergence in the sense that you were more optimistic than MPC earlier and are more pessimistic than MPC now?

Every forecasting agency has its own models and assumptions about global and domestic environments. We have seen that the global environment has deteriorated quite significantly compared to what we were expecting when we did forecasting in July. As I said above, tighter global financial conditions, weaker external demand and weakening growth in China have led us to our views about India.

With the WEO saying that more than a third of the global economy will contract in 2023, while the three largest economies — the United States, the European Union, and China—will continue to stall, how do you view 6.8 per cent growth rate for India in 2022-23?

Today, India is the relative bright spot in the world. Last year, India grew by 8.7 per cent which was also a bit over pre-pandemic growth rate. This year 6.8 per cent is a good growth rate compared to other emerging markets. Average economic growth projections for emerging market and developing economies put by the IMF is about 3.7 per cent. So, 6.8 per cent is really a good number for India.

Will this growth rate be sufficient to attract portfolio investments in case dollar appreciates further as IMF projected and investors go for safe haven investments? You have also said above that tighter monetary conditions in advanced nations may hamper investments flows into India.

Tighter global financial conditions will mean less money for investments. As we just discussed, India's growth rate is quite attractive among emerging markets. This can help investment flow. We have seen FPI investments in equity in August. Authorities in India have also taken steps to expand government securities that can be held by non-residents without restrictions. The so-called Fully Accessible Route started in March, 2020 and it expanded in July 2022. It includes all new issuances for five years, ten years, 13 years and other tenor government securities. We also see the digitisation story in India for investments in a number of sectors such as the technological sector. Besides, trade agreements that authorities in India have started discussing with the EU for example, and the agreements concluded with the UAE, Australia will open the scope for more investments into and exports from India.

With the world economy facing significant downward risks from geopolitical tensions between Russia and Ukraine as well US and China, should the IMF not come out with a range of growth projections rather than a specific number?

There is always uncertainty around forecasts. It is not a perfect science. Uncertainties are now even higher than in normal times. However, specific numbers for each and every country are important because the point estimates for growth, inflation and other variables underpin the policies that the countries plan to do and our policy advice to them. 

The IMF expects average retail price inflation in India at 6.9 per cent for 2022-23. Average inflation stands at 7.16 in the first six months of the current financial year. This means that you don't expect inflation to come down below RBI's tolerance level of six per cent in the next six months. Your take?

India has seen a lot of pressures on prices particularly food prices. Inflation in food and beverages increased significantly in September. Food and beverage constitute around half of the consumption baskets in the index. If you consider half of it, which is 25 per cent of the total index, prices for these 25 per cent have risen over six per cent on average so far this year. If you look at non-food and beverage, we have another 25 per cent of the basket whose prices are increasing above six per cent. So we see significant momentum in prices and we don't see inflation coming down below six per cent in the current financial year. However, we expect it to come down below six per cent in the next financial year.

In this respect, the IMF sounds more pessimistic than the RBI's monetary policy committee. Doesn't it?

As I said our views are determined by what we see as the momentum in prices in the markets today and what we expect in the next few months. We see that the momentum remains high. These will start coming down below the upper level of RBI's tolerance band in the next year.

The IMF suggested to the economies to adopt prudential macro-economic policies to minimize the impact of future financial turmoil. In this connection, a much-heated debate is going on in India about freebies announced by political parties. What is your stand on the issue?

These elements come under the government spending and should be guided by the Budget cycle. We always advise all countries to approach their budgets to fit in the needs of the country such as infrastructure, education and health related needs. Then there are revenue sources of the nations from taxes, non- tax revenues. The difference between sources of funds and expenditure is what governments borrow. The government has to decide where to spend efficiently which can derive most benefits.

IMF has cautioned about taking out manufacturing from China. Does it mean that you are warning against the pitfalls of programmes such as production-linked incentives (PLI) in India?

We are always supportive of trade. Trade has always been a very important driving force for global growth and lifting people out of poverty for decades. We believe that countries should trade and discuss among themselves how to reduce barriers to trade, both tariff and non-tariff ones related to goods, services and capital flows.  This will benefit all. The PLI schemes are aimed to provide incentives for specific sectors to increase production and exports, which are objectives that we would support.