IMF sharply lowers India’s FY23 growth forecast  to  7.4%

The International Monetary Fund (IMF) on Tuesday slashed India’s economic growth forecast to 7.4% from 8.2% it estimated in April, citing the economy’s vulnerability to external shocks and rapid monetary policy tightening.

In its latest World Economic Outlook update, IMF suggested policymakers prioritize taming inflation through further monetary policy tightening. The IMF also cut the global growth outlook and warned that the world may soon be on the brink of a recession. Global economic expansion will likely slow to 3.2% this year, slower than the 3.6% forecast by the fund in April, the IMF said.

The multilateral agency also cut India’s growth forecast for the next fiscal by 0.8 percentage points to 6.1% amid growing economic risks.

The tentative global recovery in 2021 has been followed by “increasingly gloomy developments” in 2022 because of tighter financial conditions, a worse-than-anticipated slowdown in China, and negative spillovers from the war in Ukraine, the IMF said in its World Economic Outlook Update. “For India, the revision reflects mainly less favourable external conditions and more rapid policy tightening.”

However, despite the growth downgrade, India will remain one of the fastest growing major economies in the world in 2022-23 and 2023-24. Only Saudi Arabia, estimated to grow 7.6% in 2022, is expected to outpace India. However, growth in the Kingdom is expected to slow to 3.7% in the following year.

In comparison, China’s growth is estimated to slow to 3.3% in 2022 from 4.4% estimated earlier by IMF. Other emerging markets and developing economies, including Russia, South Africa, and Brazil, saw an upward revision in their economic forecasts on improved outlook.

Nevertheless, the IMF’s growth forecast for India is among the most optimistic. The Reserve Bank of India has projected the economy’s growth for 2022-23 at 7.2%.

The Asian Development Bank on Thursday lowered its growth forecast for India to 7.2% for 2022-23 from 7.5% estimated earlier, given higher-than-expected inflation and monetary tightening.

Tighter monetary policy will inevitably have real economic costs, but a delay will only exacerbate them, the report said.

It said economies in which underlying inflation and inflation expectations have risen persistently and significantly above target levels need to take decisive action to tighten monetary policy, with central banks shrinking their balance sheets and raising interest rates.

RBI’s monetary policy committee hiked the repo rate by 90 basis points in May and June, raising it to 4.9%. The rate-setting panel will meet again in the first week of August.

The IMF report attributed the 0.8 percentage points negative revision for the ‘emerging and developing Asia’ grouping mainly to the slowdown in China and the growth moderation in India.

According to the latest update, global trade growth in 2022 and 2023 will likely slow more than expected, reflecting the decline in global demand and supply chain problems.

“The dollar’s appreciation in 2022—by about 5% in nominal effective terms as of June compared with December 2021––is also likely to have slowed world trade growth, considering the dollar’s dominant role in trade invoicing as well as negative financial balance sheet effects on demand and imports in countries with dollar-denominated liabilities,” the IMF said.