Fund slashes India’s FY20 growth forecast to 4.8%, also trims global outlook
'Growth in India slowed sharply owing to stress in the NBFC sector and weak rural income growth,' said IMF chief economist Gita Gopinath
New Delhi: The International Monetary Fund (IMF) on Monday slashed India’s growth forecast by 1.3 percentage points to 4.8% for 2019-20, prompting the agency to also trim its global growth estimates as a result.
IMF chief economist Gita Gopinath said growth in India slowed sharply “owing to stress in the non-bank financial sector and weak rural income growth".
“We project global growth to increase modestly from 2.9% in 2019 to 3.3% in 2020 and 3.4% in 2021. The slight downward revision of 0.1 percentage point for 2019 and 2020, and 0.2 percentage point for 2021, is owed largely to downward revisions for India," she said in IMF’s World Economic Outlook (WEO) update.
While the Indian government’s statistics department and the Reserve Bank of India (RBI) have estimated growth in 2019-20 at 5%, rating agency Moody’s Investors Service has projected growth at 4.9% for the fiscal.
The IMF report, however, projected India’s growth to revive in 2020-21 to 5.8%, 30 basis points below its October estimate, “supported by monetary and fiscal stimulus as well as subdued oil prices".
Finance minister Nirmala Sitharaman, scheduled to present her second budget on 1 February, is expected to increase infrastructure spending and boost rural expenditure to revive growth, which slowed to a six-and-a-half-year low of 4.5% in the quarter ended 30 September.
IMF in its Article IV consultation report on India released last month said the Indian government should avoid a fiscal stimulus to boost the economy and, instead, opt for an easier monetary policy. “In the near term, given the cyclical weakness of the economy, monetary policy should maintain an easing bias, at least until the projected recovery takes hold. Fiscal stimulus should be avoided, given (that the) fiscal space (is) at risk and revenue losses from the recent corporate income tax rate cut should be offset. In the event of a more severe economic slowdown than currently envisaged, any fiscal stimulus should be temporary, focusing on measures to boost near-term growth, such as immediate investment expensing or public infrastructure spending," IMF had said.
However, retail inflation has picked up since and RBI has paused its monetary easing cycle. Retail inflation touched a five-and-a-half-year high of 7.35% in December, breaching the central bank’s tolerance limit of 6%. This may constrain RBI from not only further monetary easing in its policy review on 6 February, but may also force it to rethink its accommodative policy stance.
D.K. Joshi, chief economist at Crisil Ltd, said the IMF growth projection for India shows economic downturn is quite entrenched. “Monetary policy having run its course, the government should spend wisely to support economic recovery," said Joshi.
IMF, in its WEO update, raised China’s growth estimate by 20 basis points to 6% for 2020, reflecting the signing of the phase I trade deal with the US.
Despite several headwinds, IMF said some indications have emerged towards the year-end that global growth may be bottoming out. The report, however, warned that downside risks remain prominent, including rising geopolitical tensions, notably between the US and Iran, intensifying social unrest, further worsening of relations between the US and its trading partners and deepening economic friction between other countries.
“The pickup in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for underperforming emerging and developing economies such as Brazil, India, and Mexico. A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline," cautioned IMF.