The International Monetary Fund (IMF) in its latest World Economic Outlook (October 2012) has painted a bleak picture for India. It expects the Indian economy to expand by just 4.9% in the year 2012. Though IMF adopts a different methodology, the projection is marginally lower than 5.4% achieved in the first half of the calendar. IMF also revised its growth outlook downwards by a full 1.3 percentage points for India, highest for any listed large economy, when compared with its July outlook. Also, based on IMF projection, growth in India will be 2.9 and 1.8 percentage points lower than China and developing Asia, respectively. For the Indian economy, the fund underlined that “the outlook for India is unusually uncertain.” It further noted: “India’s activity suffered from waning business confidence amid slow approvals for new projects, sluggish structural reforms, policy rate hikes designed to rein in inflation, and flagging external demand.”
Growth is not the only area about which India and the Government of India need to worry about. The Fiscal Monitor (October 2012), also prepared by IMF, shows that with expected fiscal deficit of 9.5% of the gross domestic product in the year 2012, India’s fiscal situation is worse than that of Spain and Italy—the two weak links in the euro zone. The macroeconomic condition is critical and requires serious attention. Although the government, after long delay and deliberation, has taken some steps in the right direction, they are unlikely to yield results in the near term. Moreover, the basic issue and the source of majority of problems that the Indian economy faces today is that of a large fiscal deficit and it remains largely unaddressed for now. Therefore, despite the renewed euphoria in the stock markets because of opening up of certain sectors to the foreign direct investment, the underlying threat to the macroeconomic stability has not abated. Indian economy has landed into a complex web of large twin deficit, high inflation and slowing growth and it is always difficult to come out of such a situation.
Although the numbers presented by IMF are not significantly different from the expectations and projections made by domestic economists, policymakers will do well not to postpone a hard choice for effecting a fiscal correction till a later date. The government needs to present a road map that clearly shows how it plans to carry out this complex and difficult task. Only that will boost the confidence of investors and push economic growth in the medium term.
Can India return to high growth path without fiscal correction?