Slow recovery in consumer confidence behind cut, says fund
IMF warned that growth could disappoint relative to the baseline if financial conditions were to tighten abruptly
The International Monetary Fund (IMF) on Tuesday slashed India’s economic growth projection for FY22 to 9.5% from 12.5% estimated in April, citing a slow recovery in consumer confidence because of the ferocious second wave of the pandemic and a tardy vaccination programme.
“Recovery has been set back severely in countries that experienced renewed waves—notably India. Growth prospects in India have been downgraded following the severe second covid wave during March-May and expected slow recovery in confidence from that setback," IMF said in the latest update to its bi-annual World Economic Outlook.
Gita Gopinath, chief economist at the IMF, said the Delta variant is dominant around the world right now, and it has already affected IMF’s growth forecasts.
“For instance, the downgrade that we have for emerging Asia, including India, comes because of the Delta variant and the rising number of cases that we are seeing in many parts of the world, including in Indonesia and Malaysia. In the US also we are seeing cases going up again. So, that is an important concern, and even though we have incorporated some of it in our forecast, there is still an important downside risk, depending upon how this evolves in the future," she added.
Most professional forecasters have reduced their growth projections for India after the virulent second wave of the pandemic hit the economy, damaging consumer confidence and rural demand.
The Reserve Bank of India (RBI) also expects the economy to grow at 9.5% in FY22.
While IMF kept its global growth forecast unchanged at 6% for 2021, it marked down prospects for emerging market and developing economies, especially for emerging Asia, and revised up forecasts for advanced economies due to divergence in vaccine rollout.
“In countries with high vaccination coverage, such as the UK and Canada, the impact would be mild; meanwhile, countries lagging in vaccination, such as India and Indonesia, would suffer the most among G20 economies," it said.
Madan Sabnavis, chief economist at Care Ratings, said manufacturing is getting back into action in India while the services sector trails.
“Agriculture is assumed to do well, given the monsoon forecast. But there can be a downside, with the infection spreading into rural areas in April-May. We had forecast GDP growth at 8.8-9% for FY22 and would be holding on to this estimate as of now in the absence of a third wave. Infection levels are stable and certainly not deteriorating," he added.
IMF cautioned that growth could disappoint relative to the baseline if financial conditions were to tighten abruptly, for instance, if inflationary pressures persist longer than expected and lead to another reassessment of the monetary policy outlook, particularly in the US; corporate bankruptcies tick up markedly, or price corrections in segments such as crypto assets trigger broader sell-offs.
“Central banks should avoid prematurely tightening policies when faced with transitory inflation pressures but should be prepared to move quickly if inflation expectations show signs of de-anchoring. Emerging markets should also prepare for possibly tighter external financial conditions by lengthening debt maturities where possible and limiting the buildup of unhedged foreign currency debt," it said.
India’s overall fiscal deficit, including both the Centre and states, is projected to marginally narrow to 11.3% of GDP in FY22 from 12.8% in FY21, while the gross debt-to-GDP ratio is estimated to rise to 90.1% in FY22 from 89.4% in FY21.
The multilateral lender said fiscal policy should continue to prioritize health spending, including on vaccine production and distribution infrastructure, personnel, and public health campaigns, to boost take-up. “In emerging markets and developing economies with more limited fiscal space, reorienting spending away from untargeted subsidies and recurrent expenditures and toward health, social, and infrastructure outlays can help create some of the needed room," it added.
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