New Delhi: The International Monetary Fund (IMF) on Tuesday lowered India’s growth forecast for 2013-14 to 5.6% from the 5.8% it projected in April, holding that the risks of a longer downturn in emerging market economies had increased because of domestic capacity constraints, slowing credit growth and weak external demand.
In an update to its April World Economic Outlook, IMF said India’s growth would recover to 6.3% in 2014-15, marginally lower than its April forecast.
India’s economy expanded 5% in the year ended 31 March, the slowest pace in 10 years, as high borrowing costs intended to douse inflation hurt corporate investment and consumer spending, and weak external demand curbed export growth.
The finance ministry expects growth to exceed 6% in the current financial year.
However, the projections by IMF and the finance ministry are not comparable because they use different data sets to measure economic growth.
IMF cautioned that while old risks such as a protracted recession in the euro area remain, new threats have emerged in the emerging markets because of the anticipated unwinding of monetary policy stimulus by the US, which may lead to sustained capital flow reversals.
The Fund revised down its global growth forecast to 3.1% in 2013 from 3.3% projected earlier. While the US growth estimate has been lowered to 1.7% in 2013 from 1.9% projected in April, economic output in the euro area is expected now to contract 0.6%, compared with the 0.8% contraction projected earlier.
As the US economy recovers faster than expected, risk appetite for emerging market assets will diminish, said D.K. Joshi, chief economist at the rating agency Crisil Ltd. “So there will be hiccups in the short run,” he said.
IMF said growth continued to disappoint in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and in some cases, weaker policy support.
The Fund said that for stronger global growth, major advanced economies should maintain a supportive macroeconomic policy mix, combined with credible plans for reaching medium-term debt sustainability. Many developing economies have to opt for structural reforms while maintaining macroeconomic stability to sail through the crisis.
“Emerging market economies have generally been hit hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity have led to some capital outflows, equity price declines, rising local yields, and currency depreciation,” it said.
IMF advocated that the US continue its monetary policy stimulus until its economic recovery is well-established. “Clear communication on the eventual exit from monetary stimulus will help reduce volatility in global financial markets,” it said.
The Indian currency has been the worst performer against the dollar since the US Federal Reserve said in May that it would gradually start withdrawing monetary stimulus, starting in September, should the economic recovery continue as expected. In June alone, the currency tumbled 4.9%, making it the worst performer among 78 global currencies, according to Bloomberg data, as investors pulled money out of Indian stocks and bonds.
In the quarter to June, the currency lost 8.6%. The rupee closed at 60.14 a dollar on Tuesday after strengthening to an intra-day high of 59.65, a sharp rebound from Monday’s intra-day record low of 61.21.
The impact of capital outflows demonstrated the extent to which India has become dependent on foreign funds that have gushed into emerging markets after the Fed embarked on an easy money policy to stimulate the US economy following the 2008 financial crisis.
Emerging markets received at least $250 billion a year between 2010 and 2012. Since 2009, foreign investors have pumped about $90 billion into Indian equities and $24 billion into bonds.