Beyond headlines: IMF’s projections for India

Note that the IMF predicts growth will be stuck around the current level for the next couple of years


The new forecasts of the International Monetary Fund, or IMF, about the Indian economy have been about it being the bright spot in the world economy and about its rate of growth being the highest among major economies. Photo: Bloomberg
The new forecasts of the International Monetary Fund, or IMF, about the Indian economy have been about it being the bright spot in the world economy and about its rate of growth being the highest among major economies. Photo: Bloomberg

Much discussion about the International Monetary Fund’s (IMF) new forecasts about the Indian economy has understandably been about it being the bright spot in the world economy and about its rate of growth being the highest among major economies.

While we deserve a pat on the back for that performance, note that the IMF predicts that growth will be stuck around the current level for the next couple of years.

The current rate of growth is, therefore, about as good as it gets.

Chart 1 shows the growth in gross domestic product at constant prices. Note that GDP growth of 7.3% in 2015-16 is expected to rise to 7.5% by 2017-18 (for India, the data is on a fiscal year basis, e.g. the growth for 2015 is actually for 2015-16).

Next, they expect total investment as a percentage of GDP to go down further in 2016-17, so they don’t seem to be banking on a revival of investment demand any time soon. Indeed, the investment-to-GDP ratio in 2016-17 is expected to be the lowest since 2003 (see chart 2).

The chart also shows the IMF’s projections for the savings-to-GDP ratio for 2016-17 is the lowest since 2003. Clearly, they’re relying on consumption growth to boost the economy.

Third, the IMF seems to be sceptical about the ability of consumer price inflation to go down further. The chart shows the IMF expects consumer price inflation at the end of 2016-17 at 5.1% and at 5.4% by the end of 2017-18. Note that the Reserve Bank of India’s target for inflation in 2018 is 4%. Also, inflation is higher than in the early 2000s in spite of plummeting oil and commodity prices (see chart 3).

One of the reasons why getting growth momentum up is so difficult is because the rest of the world is down in the dumps and as a result export growth is pedestrian. Chart 4 shows that the growth in the volume of export of goods is currently one of the lowest since the nineties. A big jump in exports is projected only in 2017-18.

Chart 5 shows that in spite of all the fiscal compression by the central government, the IMF expects the general government net borrowing (which includes the states) to come down only gradually. It will still be well above that of 2006 and 2007 and indeed, higher than in 1991.

And finally chart 6 shows how India’s share of world GDP (in purchasing parity terms) has almost doubled since 2000.

However, over the same period China’s share of global GDP has grown by leaps and bounds so much so that China has overtaken the US in its share of world GDP in PPP terms. Measured in US dollars, though, the US economy in 2015 was 24.5% of world GDP; the Chinese economy 15% and the Indian economy 2.9%.

Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at capitalaccount@livemint.com

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