IMF slashes India growth forecast for FY23 to 6.8%

IMF expects global growth to remain unchanged in 2022 at 3.2% and to slow to 2.7% in 2023. (AFP)
IMF expects global growth to remain unchanged in 2022 at 3.2% and to slow to 2.7% in 2023. (AFP)

Summary

Multilateral agency cites impact of external headwinds, weaker growth in Q2

NEW DELHI : The International Monetary Fund (IMF) on Tuesday sharply cut India’s economic growth estimate for FY23 to 6.8% from its July estimate of 7.4%, citing the impact of external headwinds and weaker-than-expected second-quarter growth.

In its latest World Economic Outlook, the multilateral agency highlighted that the global economy continues to face challenges, including inflation, tighter financial conditions, Russia’s invasion of Ukraine, and the lingering covid pandemic. In addition, the report pointed out that more energy and food price shocks might cause inflation to persist, while the tightening global financing conditions could trigger widespread emerging market debt distress. The IMF also cautioned that monetary policy could miscalculate the right stance to reduce inflation.

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“The outlook for India is a growth of 6.8%, a 0.6 percentage point downgrade since the July forecast, reflecting a weaker-than-expected outturn in the second quarter and more subdued external demand," said the IMF in its World Economic Outlook: Countering the Cost-of-Living Crisis.

However, despite the growth forecast downgrade, India will remain one of the fastest-growing key economies in 2022 and 2023. China’s growth is estimated to slow to 3.2% in 2022 and 4.4% in 2023. The IMF cited the continuing uncertainty in China’s vital property market as a major risk to growth.

The multilateral agency retained India’s growth forecast for FY24 at 6.1%, despite lingering downside risks.

India’s official data released in August showed the economy grew well below expectations at 13.5% in April-July due to the dismal performance of the manufacturing sector.

The IMF forecast also follows a slew of downward revisions in growth estimates by other agencies. The World Bank last week lowered India’s growth forecast to 6.5% for 2022-23, while the Asian Development Bank and the Reserve Bank of India cut the projection to 7%.

IMF expects global growth to remain unchanged in 2022 at 3.2% and to slow to 2.7% in 2023, which is 0.2 percentage points lower than the July forecast, with a 25% probability of falling below 2%. It cautioned that the risks to the outlook remain unusually large and to the downside. IMF data also shows that much of the contraction in growth will be seen in advanced economies like the US and the UK.

Some emerging markets and developing economies, including Russia and South Africa, along with advanced economies, including the US and euro area countries like Germany, France, and Italy, received an upward revision in their economic forecast on improved outlook.

In fact, the world’s 19th largest economy, Saudi Arabia, is now estimated to grow faster than India at 7.6% in 2022 and by 3.7% in 2023.

IMF estimates India’s inflation at 6.9% in FY23 and cool to 5.1% in FY24. Normalization of monetary and fiscal policies that delivered unprecedented support during the pandemic is cooling demand as policymakers aim to lower inflation back to target, it said.

India’s retail inflation has remained around record levels of 7%, far above RBI’s tolerance range of 2-6% for eight consecutive months, largely led by higher food prices and pressures from the rising global oil and commodity prices. RBI has also retained its inflation projection at 6.7% for the current fiscal year in its latest policy meeting.

The IMF cautioned that monetary policy could miscalculate the right stance to reduce inflation. However, it added that front-loaded and aggressive monetary tightening is critical to avoid inflation de-anchoring as a result of households and businesses basing their wage and price expectations on their recent inflation experience.

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