New Delhi: The International Monetary Fund (IMF) believes the Indian economy will recover this year—something that should bring cheer to consumers, investors, businesses, and, not the least, the new government that will take charge in May.
In its latest World Economic Outlook (WEO), IMF predicts that the Indian economy will expand by 5.4% in 2014-15 and accelerate to a pace of 6.4% the following year.
The fund estimates that India grew 4.4% in 2013-14.
According to the IMF, India’s recovery will be enabled by a stronger world economy, improving export competitiveness and policies encouraging investment.
The fund expects consumer price inflation to slow to 8% in 2014-15 and 7.5% in 2015-16 from 9.5% in 2013-14.
“Overall growth is expected to firm up on policies supporting investment and a confidence boost from recent policy actions, but will remain below trend,” IMF said. “Consumer price inflation is expected to remain an important challenge, but should continue to move onto a downward trajectory.”
Slowing demand, high borrowing costs and stalled projects on account of delays in securing mandatory government approvals have contributed to the sharpest economic downturn in India in a decade. Asia’s third largest economy grew 4.5% in the year ended 31 March 2013; the government expects sub-5% growth in the year just gone by.
IMF projections are not directly comparable with growth estimates released by the government because they are calculated at market prices; government data is based on 2004-05 prices.
The fund’s call on inflation seems right. Already, inflation has eased substantially with inflation based on the Consumer Price Index coming in at 8.1% in February.
IMF warned that though interest rate hikes by the Indian central bank may address inflation, they could hurt economic growth.
The Reserve Bank of India has raised the policy rate by three quarters of a percentage point since September to 8%.
“Reforms should focus on removing structural impediments to growth in India,” IMF said.
The report pointed out that India’s external vulnerabilities have lessened because of growth in exports and measures to curb gold imports that have reined in the current account deficit.
“Most of the economic indicators are showing signs of recovery. While the rupee has become stronger, industrial output has also turned positive after contracting for three consecutive months. The recovery, however, will only be gradual and not V-shaped”, said Devendra Kumar Pant, chief economist at India Ratings and Research Pvt. Ltd.
“Growth in the current fiscal is expected to be driven by an improvement in the services and manufacturing sector. Agricultural growth, however, may be lower than that in 2013-14, irrespective of the El Nino effect. We expect the economy to grow at 5.6% in 2014-15,” he said.
El Nino is a weather phenomenon involving warm ocean currents in South America’s Pacific coast that causes a poor monsoon in India.
The US economy is expected to grow 2.8% in 2014 and 3% in 2015, as against 1.9% in 2013.
In the US, growth in 2013 was higher than expected, and recent data remains consistent with a further pick-up in 2014 as improvement in the labour and housing markets continues and the fiscal drag wanes.
The IMF report also sounded a positive note for the euro zone, which has emerged from recession, though it warned that risks persist. The euro zone is expected to grow 1.2% in 2014 and 1.5% in 2015 after having contracted 0.5% in 2013.
IMF said growth in emerging market economies is projected to pick up only modestly. It pointed out that these economies are “adjusting to a more difficult external financial environment in which international investors are more sensitive to policy weakness and vulnerabilities given prospects for better growth and monetary policy normalization in some advanced economies”.
“Emerging market and developing economies must therefore be ready to weather market turmoil and reduce external vulnerabilities,” it said.
India’s economy is strongly coupled with the world’s, said Rajesh Chakrabarti, executive director at Bharti Institute of Public Policy, and a member of the faculty at the Mohali campus of the Indian School of Business.
“India is significantly dependent on the global recovery be it through trade or capital flows. An improvement in external environment will be positive for India,” he said.