IMF Cuts India GDP Growth Forecast To 6.1% For The Current Year

The International Monetary Fund cut India’s growth forecast sharply for the current year, joining a list of organisations forecasting a sharp slowdown in the Indian economy.

The IMF expects the Indian economy to grow by 6.1 percent in the current financial year, compared to its earlier forecast of 7 percent, the organisation said in the latest update of its World Economic Outlook. Growth in the next financial year is forecast at 7 percent, down from a forecast of 7.2 percent earlier.

Compared to the forecasts in the April World Economic Outlook, the IMF has cut India’s projected growth rate by 1.2 percentage points.

“The downward revision relative to the April 2019 WEO of 1.2 percentage points for 2019 and 0.5 percentage points for 2020 reflects a weaker than expected outlook for domestic demand. Growth will be supported by the lag effect of monetary policy easing, a reduction in corporate income tax rates, recent measures to address corporate and environmental regulatory uncertainty and government programs to support rural consumption,” the IMF said.

The IMF has also cut its global growth forecast to 3 percent from a projection of 3.2 percent in July. For China, the growth forecast has been cut to 6.1 percent from 7 percent.

Commenting on some of the factors behind the sharp revision in India’s growth forecast, chief economist Gita Gopinath said that vulnerabilities in the financial sector have impacted the broader economy.

“There has been a negative impact on growth that's come from vulnerabilities in the non-bank financial sector, and the impact that it has had on consumer and small and medium enterprises’ borrowings,” said Gopinath in response to a question by BloombergQuint at a press briefing following the release of the World Economic Outlook report.

“Some measures have been taken, but there's still a lot more that needs to be done including cleaning up of the balance sheets of the regular commercial banks,” said Gopinath, adding that the projections for 2020 are based on the premise that these particular bottlenecks will clear up.

When asked about India’s government finances, Gopinath said that revenue projections look optimistic, particularly after the recently announced corporate tax cuts.

Growing List Of Forecast Cuts

The IMF joins a growing list of agencies which have cut India’s growth forecast in recent weeks.

The Reserve Bank of India has pegged down its growth expectation for the current financial year from 6.9 percent earlier to 6.1 percent now. The World Bank, too, has pared expectations and now expects growth at 6 percent in the current fiscal year, compared with 7.5 percent forecast in April.

“India’s cyclical slowdown is severe,” the World Bank said in its report. The weakness is mostly due to a deceleration in local demand, according to the bank. “In such a weak economic environment, structural issues surface and the weak financial sector is becoming a drag on growth.”

Rating agency Moody’s Investors Service, which now expects growth of 5.8 percent in the current financial year compared to its earlier forecast of 6.2 percent, said that India’s slowdown may be partly long lasting.

Growth is expected to pick-up to 6.6 percent in the following year and to 7 percent over the medium term, Moody’s said. There are few prospects of a rapid bounce-back in the Indian economy, Marie Diron, managing director—sovereign risk at Moody’s, told BloombergQuint. “Compared with only two years ago, the probability of sustained real GDP growth at or above 8 percent has significantly diminished,” she said.

The Medium-Term Agenda For India

Pegging India’s medium term growth potential at 7.3 percent, the IMF said that measures to address cyclical challenges and continued implementation of structural reforms is needed to strengthen the economy.

“In India, monetary policy and broad-based structural reforms should be used to address cyclical weakness and and strengthen confidence,” the IMF said. It added that a “credible” fiscal consolidation path is needed to bring down elevated public debt over a period of time. The IMF also called for a reduction in subsidies and tax-base enhancing measures in India.

India has committed to bringing down its central government fiscal deficit to 3 percent but this target has been pushed back a number of times. For the current year, the government has set a fiscal deficit target of 3.3 percent of GDP.

India’s financial sector also needs reforms, the fund said.

Reforms on hiring and firing of workers would help incentivise job creation and land reforms would encourage and expedite infrastructure development, the IMF added.