Rosy forecast may be from calculating GDP at market prices
The International Monetary Fund (IMF) today revised upwards its India growth projection for 2010 to 9.7 per cent, from the earlier estimate of 9.4 per cent. However, doubts were cast about the multilateral agency’s estimates.
In its latest Macroeconomic and Monetary Developments report, Reserve Bank of India had pointed out that IMF’s growth projections were for gross domestic product (GDP) at market prices, which includes the trend in indirect taxes net of subsidies. While pointing to the large divergence between GDP at factor cost and at market prices, RBI had pointed out that IMF’s previous estimate had factored in the tax turnaround in January-March 2010.
The upward trend in indirect tax collections has continued. According to the latest data released by the finance ministry, April-August saw these taxes increase by nearly 46 per cent to over '1.24 lakh crore. While the subsidy numbers are unavailable, the government had budgeted for an 11 per cent decrease in major subsidies such as those for food, fertiliser and petroleum, which are expected to decline to '1.16 lakh crore in 2010-11.
While the IMF’s World Economic Outlook report does not spell out its methodology, the agency’s estimates put India’s growth estimates next only to China. It has said the India growth story was led increasingly by domestic demand. “Robust corporate profits and favourable external financing will encourage investment,” it said. The report added that low reliance on exports, accommodative policies, and strong capital inflows have supported domestic activity and growth.
This is the third straight revision of IMF’s growth projections for India. Originally, the economy was projected to expand by 8.8 per cent. The multilateral body’s projection for 2010 is the highest among those made by several agencies. The government and Reserve Bank of India, which release estimates for the financial year ending March, have estimated GDP growth at around 8.5 per cent in 2010-11.
Though the government did not to comment on the IMF’s latest projections, in the past Finance Minister Pranab Mukherjee had said he would not contest the agency’s estimates.
The IMF also listed India among economies that are growing above potential, though some comfort can be drawn from its assessment that the growth rate is moderating. It also pointed out that capacity constraints were affecting some major emerging economies such as India, which has seen a sharp rise in inflation.
| IMF’S GLOBAL FORECAST 2011 GROWTH PROJECTIONS FOR MAJOR ECONOMIES | |
| GDP growth in % | 2011 |
| China | 9.6 |
| India | 8.4 |
| Brazil | 4.13 |
| Russia | 4.3 |
| Korea | 4.5 |
| Japan | 1.5 |
| United Kingdom | 2.02 |
| USA | 2.3 |
| Developing Asia | 8.4 |
| Advanced economies | 2.2 |
| E: Earlier based on forecast in April U: Update | |
Among the policy prescriptions, the report listed out fiscal consolidation as a priority area given that fiscal risks are building. Besides, it said that further financial sector development and capital market deepening was required in India.
The good news is that IMF expects the recovery to continue and the world economy is projected to expand by 4.8 per cent, compared with 4.6 per cent estimated earlier. For 2011, the projection has been retained at 4.2 per cent, with Asia leading the recovery.
Then other piece of good news is that the price of crude oil and several other commodities are likely to remain around existing levels in the near term. Pointing to India’s monetary tightening through rate hikes and higher cash reserve requirements, the World Economic Outlook said these actions are expected to proceed at a gradual pace, as inflation is generally projected to be contained.
