IMF forecasts: the background to the 2019 elections
What the International Monetary Fund (IMF) forecasts about the Indian economy for 2018-19 carries more than the usual interest
How the economy performs in the current fiscal year is especially significant, since it will form the backdrop to the general elections next year. What the International Monetary Fund (IMF) forecasts about the Indian economy for 2018-19 therefore carries more than the usual interest. Listed below is what the IMF data says about the Indian economy this year as well as what the IMF’s recently published World Economic Outlook (WEO) says. The IMF is no soothsayer, so forget about the longer-term predictions.
Gross domestic product (GDP) growth in 2018-19 is forecast at 7.4%, up from 6.7% this year. What will drive this growth? The WEO says it’ll be “lifted by strong private consumption as well as fading transitory effects of the currency exchange initiative and implementation of the national goods and services tax.” A pick-up in private consumption should warm the cockles of the government’s heart.
The IMF database shows a rise in total investment as a percentage of GDP to 32%, from 31.7% in 2016-17. It’s not a big jump, but at least the trough in investment demand is behind us. The level of investment demand, of course, is well below the 38.3% of GDP it notched up in 2012-13.
Also, the IMF doesn’t expect the pick-up in investment growth to be financed out of increased savings. Savings as a percentage of GDP is expected to be 29.7% of GDP in 2018-19, about the same as in the previous year and way below the 33.5% of GDP it was in 2012-13.
Exports and imports
The volume of exports of goods and services is forecast to rise by 8.2% in 2018-19, slightly more than the rate of growth in the previous year. That will be a disappointment.
The volume of imports, on the other hand, is expected to drop sharply from 10.6% in 2017-18 to 8.1%. It is unclear why import growth should slow when growth and investment demand are improving, but part of the reason for the slowdown could be the import curbs put in place. If lower imports help in increasing domestic production, that will be a positive.
Current account deficit
Even with the drop in import volumes, the current account deficit is expected to move up to 2.3% of GDP, the highest in six years. That should be warning signal for the government.
The overall fiscal deficit—of the central as well as the state governments combined—is expected to move down from 6.9% of GDP in 2017-18 to 6.5% of GDP. This is the result of a higher tax-to-GDP ratio, no doubt due to the goods and services tax (GST).
The bond market doesn’t share the IMF’s optimism about the fiscal deficit and interest rates are moving up. The IMF too is cautious—it says in the WEO that, “India’s high public debt and recent failure to achieve the budget’s deficit target call for continued fiscal consolidation into the medium term to further strengthen fiscal policy credibility.”
The IMF’s Fiscal Monitor says, “In India, a return to a gradual path of growth-friendly fiscal consolidation is desirable to create fiscal space, but full and smooth implementation of the new goods and services tax is necessary to avoid tax revenue underperformance resulting in cuts to capital expenditures.” The government will have to try to soothe the bond markets.
According to the IMF projections, average consumer price inflation is expected to be 4.96%. That’s much higher than 2017-18’s average of 3.6%. At the end of 2018-19, the IMF expects consumer price inflation to be 5.2%. Higher inflation may lead to higher interest rates and a tighter monetary policy by the Reserve Bank of India.
The banking sector
The WEO says the corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India. While recapitalization of the public sector banks will improve the banking sector’s ability to support growth, recapitalization should be part of a broader package of financial reforms to improve the governance of public sector banks. The question here is whether the bankruptcy code will start yielding its fruits early.
Growth is not enough—it also has to be inclusive. The WEO has this to say: “an important challenge is to enhance inclusiveness. The main priorities for lifting constraints on job creation and ensuring that the demographic dividend is not wasted are to ease labour market rigidities, reduce infrastructure bottlenecks, and improve educational outcomes.” The government, through its extensive road building programme, is trying to increase jobs in the construction sector.
Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at firstname.lastname@example.org
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