New Delhi: The International Monetary Fund (IMF) further cut its annual growth forecast for India, as it expects weaker domestic demand to limit an economic recovery.

The economy is now expected to expand 7% in the year ending 31 March 2020, 0.3 percentage point slower than IMF’s April projection. In April, the Fund cut India’s growth outlook by 0.2 percentage point to 7.3%. Economic growth is expected to accelerate to 7.2% in the following year.

“The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand," IMF said on Tuesday in its update to the World Economic Outlook (WEO).

The broad-based slowdown in consumption and investment demand in India was partly a reflection of the uncertainties associated with the just concluded general elections in India, as well as tightening of borrowing conditions for small and medium enterprises, IMF chief economist Gita Gopinath told reporters.

“However, we expect some of that to improve in the near term. That, along with a more accommodative monetary policy and fiscal policy of the Indian government, should remove some of the downside risks," she said.

Gross domestic product growth in India in the March quarter slowed more than expected to 5.8% from 6.6% in the December quarter. This was the slowest quarterly GDP growth in five years. Annual GDP growth slowed to 6.8% in the year ended 31 March from 7.2% in the previous year.

Since last month, Reserve Bank of India (RBI), the Economic Survey of the finance ministry, and the Asian Development Bank have cut their growth outlook for India to 7%.

IMF said the recent softening of inflation across emerging markets and developing economies gives central banks the option of becoming accommodative, “especially where output is below potential and inflation expectations are anchored".

Last month, RBI cut policy rates for the third consecutive time by 25 basis points (bps) and changed its stance to accommodative from neutral, signalling that more rate cuts were in store to revive growth and support faltering consumer demand.

(Graphic: Paras Jain/Mint)
(Graphic: Paras Jain/Mint)

With retail inflation at 3.18% in June, most analysts expect RBI to cut interest rates for the fourth consecutive time in its policy review on 7 August.

IMF also revised downward its growth projections for China as well as for the world by 10bps each to 6.2% and 3.2%, respectively, for 2019.

“In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt," IMF said.

Gopinath said global growth is sluggish and precarious, as some of these are self-inflicted. “Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased," she said.

US-China trade negotiations broke down in May, prompting the US to increase the tariff from 10% to 25% on $200 billion worth of imports from China. It also threatened tariffs on another $300 billion of Chinese imports. China retaliated by raising tariff rates on $60 billion worth of US imports.

Downside risks have intensified since the April 2019 WEO and risks to its forecasts are mainly to the downside, said the WEO update.

“They include escalating trade and technology tensions, the possibility of a protracted risk-off episode that exposes financial vulnerabilities accumulated over years of low-interest rates, geopolitical tensions, and mounting disinflationary pressures that make adverse shocks more persistent," it said.

IMF said multilateral and national policy actions are vital to place global growth on a stronger footing.

“The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements. Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms," it said.

The WEO update said while monetary policy remains accommodative, fiscal policy should balance multiple objectives such as smoothing demand as needed, protecting the vulnerable, bolstering growth potential with spending that supports structural reforms, and ensuring sustainable public finances over the medium term.

“If growth weakens relative to the baseline, macroeconomic policies will need to turn more accommodative, depending on country circumstances. Priorities across all economies are to enhance inclusion, strengthen resilience, and address constraints on potential output growth," it said.

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