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BENGALURU : The International Monetary Fund (IMF) on Tuesday slashed India’s economic growth forecast to 8.2% for FY23 from 9% estimated in January, citing the impact of high oil prices on consumer demand and private investments.

In its World Economic Outlook report, the multilateral agency recommended monetary tightening by central banks to keep inflationary expectations in check amid global supply disruptions caused by the war in Ukraine. The IMF warned that the war would “severely set back the global recovery," slow growth and stoke inflation. The Fund also cut India’s FY24 growth forecast to 6.9% from 7.2% estimated earlier.

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“Notable downgrades to the 2022 forecast include... India, reflecting in part weaker domestic demand—as higher oil prices are expected to weigh on private consumption and investment—and drag from lower net exports," the report said.

The 0.8 percentage point cut in India’s gross domestic product (GDP) forecast for FY23 is sharper than the 0.5 point estimated in the case of major emerging and developing Asian economies and 0.4 point for China. Nevertheless, India is projected to remain the world’s fastest-growing major economy, with China’s GDP growth estimated to slow to 4.4% in 2022 from 8.1% in 2021.

The IMF’s FY23 forecast for India is among the most optimistic so far. The Reserve Bank of India (RBI), in its latest policy meeting, lowered India’s growth projection for FY23 to 7.2% from 7.8% estimated earlier. Last week, the World Bank cut India’s FY23 growth forecast to 8% from 8.7% estimated in January.

The IMF estimated India’s inflation to average 6.1% in FY23, breaching RBI’s upper tolerance band of 6%, and ease to 4.8% in the following fiscal. In March, India’s retail inflation climbed to a 17-month high of 6.95%. Wholesale inflation accelerated to a four-month high of 14.55% in the same month, remaining in double digits for about a year. India’s inflation forecast by the IMF is higher than 3.5% estimated for developing and emerging Asian economies and 2.1% estimated for China in 2022. The report cautioned that the recent lockdowns in key manufacturing and trading hubs such as Shenzhen and Shanghai due to the resurgence of covid cases would likely compound supply disruptions elsewhere in the region and beyond. With import bills rising due to high commodity and fuel prices, the IMF estimates India’s current account deficit to widen to 3.1% in FY23 from 1.6% in FY22. Oil prices have been highly volatile in the past two months, with Brent crude oil prices touching $114 per barrel on Tuesday, compared to near $100 per barrel at the beginning of April and a 14-year high of $139.13 per barrel in March.

The IMF report flagged that monetary tightening by central banks of advanced economies may stoke inflation in emerging markets due to currency depreciation, necessitating further increases in policy rates. It added that monetary authorities should carefully monitor the pass-through of rising global prices to domestic inflation expectations to calibrate their responses. “Tighter monetary policy will be appropriate to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices," the IMF said. While RBI’s monetary policy panel maintained status quo on rates earlier this month, it pivoted toward fighting inflation from supporting growth, raising the prospect of higher interest rates.

The IMF’s FY23 forecast for India is among the most optimistic one so far. RBI has lowered India’s growth projection for 2022-23 to 7.2% from 7.8% estimated earlier.

“India is an oil importing country and is seeing the impact like any other country that’s a net importer…India’s external demand is also suffering as the rest of the world is also slowing," said Pierre-Olivier Gourinchas, chief economist and director, research department, IMF, at a press briefing. Gourinchas pointed out that war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies.

The multilateral institution also slashed global growth forecast for 2022 and 2023 by 0.8 percentage point and 0.2 point, respectively, to 3.6%. “The downgrade largely reflects the war’s direct impacts on Russia and Ukraine and global spillovers," said the report.

Madan Sabnavis, chief economist, Bank of Baroda, said while IMF’s lower projection of 3.6% was expected, the fear is on uncertainty which may lead to a downgrade in growth prospects. “This will also impact global trade flows. Rising inflation is also worry across the board," said Sabnavis.

Aditi Nayar, chief economist, ICRA Ltd, said, “We continue to peg the Indian GDP growth in FY23 at 7.2%, following supply disruptions caused by the Russia-Ukraine conflict and lockdowns in China, as well as the impact of higher prices on disposable income and demand of households. Faster capex by the central and state governments offers the key upside."

The IMF report backed targeted income support by governments to alleviate stress on household budgets in countries facing large price increases.

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