IMF retains India’s GDP growth outlook for next fiscal at 6.1%

The International Monetary Fund (IMF) on Tuesday projected India to be the fastest-growing major economy in FY24, retaining the forecast at 6.1% in its latest World Economic Outlook, citing “resilient” domestic demand despite a challenging external environment.

However, growth is expected to slow from 6.8%, estimated for FY23, according to the report, and then rebound to 6.8% in FY25.

The IMF report comes a day ahead of the Union budget FY24 on Wednesday, which is expected to help insulate India’s economy from global headwinds and geopolitical uncertainty while sticking to the path of fiscal consolidation.

“Growth in India is set to decline from 6.8% in 2022-23 to 6.1% in 2023-24, before picking up to 6.8% in 2024, with resilient domestic demand despite external headwinds,” according to the IMF World Economic Outlook update, titled Inflation Peaking amid Low growth. The forecast is in line with the Reserve Bank of India’s projection of 6.8% GDP growth for 2022-23.

It highlighted that monetary policy tightening to fight inflation and geopolitical uncertainty due to Russia’s war in Ukraine would continue to weigh on global economic activity in 2023.

However, while the rapid spread of covid-19 in China dampened growth in 2022, the recent reopening has paved the way for a “faster-than-expected recovery”, as per the report.

India’s National Statistical Office earlier this month projected the economy to expand by 7% in 2022-23, as per the first advanced estimates.

Official data released in November showed that economic growth slowed to 6.3% in the July-September quarter from 13.5% in the previous three-month period due to the dismal performance of the manufacturing sector.

The multilateral agency projected global growth to decline from an estimated 3.4% in 2022 to 2.9% in 2023 and then rise to 3.1% in 2024.

The forecast for 2023 is 0.2 percentage points higher than predicted in the October 2022 WEO but below the historical (2000–19) average of 3.8%.

“The balance of risks remains tilted to the downside, but adverse risks have moderated since the October 2022 WEO. On the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in inflation is plausible. On the downside, severe health outcomes in China could hold back the recovery, Russia’s war in Ukraine could escalate, and tighter global financing conditions could worsen debt distress,” said the report.

It added that financial markets could also suddenly reprice in response to adverse inflation news, while further geopolitical fragmentation could hamper economic progress.

While Saudi Arabia, the world’s 19th largest economy, is projected as the fastest-growing economy in 2022 at 8.7%, its growth is expected to slow to 2.6% in 2023. China’s growth is estimated to improve to 5.2% in 2023 from 3% in 2022. The IMF has projected the UK to see a 0.6% decline in its gross domestic product in 2023, indicative of a recessionary outlook. It has estimated the US growth to slow to 1.4% in 2023 from 2% in 2022.

The IMF further suggested in the report that fiscal support should be better targeted at those most affected by elevated food and energy prices and recommended that broad-based fiscal relief measures should be withdrawn.

On the inflation front, it expects about 84% of countries to have lower headline inflation in 2023 than in 2022. It expects global inflation to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024—above pre-pandemic (2017–19) levels of about 3.5%.

It projected India’s inflation at 6.9% in 2022-23, and the recent Article IV Consultation report pointed out that it will gradually return to within the RBI’s tolerance band of 4-6% next year, “reflecting favourable base effects (including for food inflation), the impact of monetary policy tightening, and well-anchored long-term inflation expectations.” It had also cautioned that the risk of second-round effects from fuel and commodity price shocks remains high even as India’s long-term inflation expectations remain relatively well-anchored.

India’s retail inflation eased to a one-year low in December at 5.72%, remaining below the Reserve Bank of India’s upper tolerance band of 6% for the second straight month, primarily led by deflation in vegetable prices.

RBI has projected inflation for 2022-23 at 6.7%. Central bank governor Shaktikanta Das said on Friday at an event that even as inflation has eased in November and December, it continues to remain elevated, while core inflation remains sticky and elevated.

RBI’s monetary policy committee on 7 December hiked the repo rate by 35 basis points (bps) to 6.25%, the fifth raise in the current fiscal year, taking the policy rate to the highest level since August 2018.