BackIndia growth may moderate to 6.1% in FY24, IMF says
The IMF 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
PremiumIndia’s economic growth is expected to moderate to 6.1% in FY24 from 6.8% estimated for the current fiscal because of high oil prices, weaker external demand, and tighter financial conditions, the International Monetary Fund said in its report released on Friday. It expects inflation in India to ease gradually over the next two years.
The IMF cautioned that the emergence of a more contagious coronavirus variant could impact trade and growth further.
“The war in Ukraine and sanctions on Russia continue to impact the Indian economy through multiple channels, including elevated commodity prices, lower external demand, and uncertainty-driven adverse confidence effects," said the Article IV Consultation report, which is based on IMF’s bilateral discussions with the Indian authorities. It estimated India’s potential growth at 6% over the medium term. The report said that the Indian authorities were confident of a 7% GDP growth in FY23 on the back of government capital spending and private demand, which are expected to strengthen further in the remainder of the year.
The IMF 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. The Reserve Bank of India’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.
Projecting India’s inflation at 6.9% in 2022-23, the multilateral agency said that it will gradually return to within the Reserve Bank of India’s tolerance bank 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."
India’s retail inflation moderated to 5.88% in November, easing below RBI’s upper tolerance limit of 6% for the first time this year.
The Article IV report said that while additional policy rate tightening is needed, it should be carefully calibrated and “clearly communicated" to balance inflationary pressures and economic activity.
The IMF noted that although India’s external position remains “sufficiently strong" to withstand external shocks in the near term, exchange rate flexibility should remain the “main shock absorber," with intervention limited to addressing disorderly market conditions.
It estimated India’s current account deficit to widen to 3.5% of GDP in FY23 from 1.7% of GDP last year, led by higher commodity prices and strengthening import demand, before declining to around 2.5% over the medium term.
It further said that even as credit growth is expected to strengthen but further financial deepening would be needed to support medium-term economic growth.
On RBI’s central bank digital currency (CBDC), it said that the presence of potentially competing private providers could limit the benefits and make it more difficult to justify the cost of adopting a CBDC. Therefore, it should aim to facilitate cross-border transactions, which would require strong international cooperation. “Important risks, such as threats to cyber security, warrant caution in implementation," it added.
It flagged that while corporate and financial sector balance sheets have improved, risks stemming from tightening financial conditions, like the potential for non-performing assets to increase with the rise in interest rates, call for additional measures.
The report added that the uncertainty about the economic outlook is high, and risks are tilted to the downside. “Should the most important downside external and domestic risks jointly materialize, growth would fall significantly in 2022-23 and 2023-24… and inflation would increase markedly, particularly in 2022-23. Both exports and imports would decline, particularly in FY2022-23, but the overall impact on the trade balance and current account would be relatively muted," it said.
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