IMF scales down India’s growth rate to 6.25%

IMF scales down India’s growth rate to 6.25%
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First Published: Wed, Mar 18 2009. 11 59 PM IST

Updated: Wed, Mar 18 2009. 11 59 PM IST
New Delhi: The International Monetary Fund (IMF) has forecast that India’s gross domestic product (GDP) growth will slow dramatically to 6.25% in the fiscal year to March, and to 5.25% in the following year. This is well below the 9% growth in the year to March 2008 and even lower than the government’s prediction of 7.1% growth in 2008-09.
The average growth in the first three quarters of the fiscal year was 6.9%. This effectively means IMF expects the economy to grow only 4.4% in the last quarter.
Also See Downside Risk (Graphic)
The current projects have a further downside risk due to large uncertainties, IMF said in a report released on Wednesday. Even though it said the government’s stimulus packages might just rescue the economy, the fund cautioned that a further expansion of the country’s fiscal deficit would spell trouble.
“The high public debt thus constrains the government’s possible actions. Nevertheless, if the economy deteriorates further, there are ways to support growth without putting the medium-term fiscal objective at risk. The government could, for example, bring forward already planned infrastructure projects,” said Sanjaya Panth, IMF’s senior resident representative in India. “The trick is to ensure that medium-term debt sustainability is safeguarded through fiscal reforms.”
IMF said corporate investment, a major growth driver in recent years, would slow because of “weakening profitability and confidence, and tightening of financing conditions from foreign and non-bank sources”. The agency expects headline inflation based on the Wholesale Price Index to average 2% in 2009-10 from a projected 8.8% average for this fiscal. Wholesale inflation eased to 2.43% in the week ended 28 February, the lowest in six years.
Suresh Tendulkar, chairman of the Prime Minister’s economic advisory council, said: “I am still betting a GDP growth rate of 7% for the current fiscal with a fourth quarter growth of 6-6.5%. The third quarter GDP data is expected to be revised upward, especially that of the farm sector.”
The executive directors of IMF who reviewed the report commended the “swift and comprehensive policy response” by the Indian government, adding that “monetary and structural policies” will have to continue to carry most of the burden of adjustment, given the high public debt to GDP ratio, which is currently running above 80%.
However, the directors were divided on the future policy action that the Reserve Bank of India should take. While some saw scope for further monetary easing in the light of the projected decline in inflationary pressures, others saw merit in the wait-and-see approach, given the highly uncertain economic environment.
The IMF board emphasized financial sector reforms, developing the corporate bond market and improving banking efficiency.
It also asked the government to hasten fuel subsidy reform in view of the falling international crude oil prices.
Graphics by Ahmed Raza Khan / Mint
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First Published: Wed, Mar 18 2009. 11 59 PM IST
More Topics: Economy | IMF | Growth | India | GDP |