India’s economic growth ‘strong’ despite 6.1% rate cut, says IMF

Although India’s economic growth rate has been cut to 6.1 per cent for the current fiscal year, it still remains “very strong” by global standards, International Monetary Fund’s (IMF) Deputy Research Director Gian Maria Milesi-Ferreti said.

Milesi-Ferreti and IMF Chief Economist Gita Gopinath made optimistic projections for India’s economy to pick up next year while addressing a news conference for the release of the IMF’s World Economic Outlook (WEO) report in Washington.

According to the report, India and China with their projected growth rate of 6.1 per cent for the current year share the top rank among major economies.

India’s “overall growth remains very strong by the standards of the world economy even though it is lower than the very high standards to which we were accustomed to in looking at India,” Milesi-Ferreti said, adding that that a “Growth rate above six per cent is still notable and extremely important in a country that has such a large population”.

This growth rate is in contrast to the global economy which, Gopinath said, is “in a synchronised slowdown, with growth for 2019 downgraded again - to 3 per cent - its slowest pace since the global financial crisis”.

The IMF has forecast “a further pick up next year” for India’s economy helped by tax cuts on the corporate sector, he said.

“In our projections, we have that India would recover to seven per cent growth in 2020,” Gopinath said.

In India “there has been a negative impact on growth that has come from financial vulnerabilities in non-bank financial sector and the impact that has had on consumer borrowing, borrowing by small and medium enterprises”, she said.

The hike in growth projection for next year is based “on the premises that these particular bottlenecks will clear up,” Gopinath said.

“Appropriate steps have been taken” to deal with these problems, while “still a lot more that needs to be done including cleaning up of the balance sheets of the major commercial banks.”

Also, she said, “On the fiscal side for India there have been some recent measures including the corporate tax cut”.

While India has not yet said how it would offset the revenue shortfall from this measure, the revenue projections look optimistic, she said.

“It is important for India to keep the fiscal deficit in check,” she added.

The WEO has cut India’s growth rate by 0.9 per cent to 6.1 per cent from the 7 per cent made in July and by 1.2 per cent from the 7.3 per cent in April.

IMF’s projected growth rate of 6.1 per cent for 2019-20 is consistent with the Indian Monetary Policy Committee’s forecast.

Explaining the cut in growth projection for India, the WEO said: “India’s economy decelerated further in the second quarter, held back by sector-specific weaknesses in the automobile sector and real estate as well as lingering uncertainty about the health of nonbank financial companies.”

It added that “corporate and environmental regulatory uncertainty” were other factors that weighed on demand.

WEO projected China’s economic growth to slow down to 5.8 per cent next year in contrast to India’s 7 per cent.

In the Euro area, growth is projected to be only 1.2 per cent this year and 1.4 next year, with German economy expected to grow by a dismal 0.5 per cent this year.

United States is expected to do slightly better with a 2.1 per cent growth projected for this year and 2.4 per cent for the next.

Gopinath blamed the slowdown on rising trade barriers, uncertainty surrounding trade and geopolitics, and structural factors, such as low productivity growth and an aging population in developed countries.

WEO said India’s growth in 2019 is sharply lower than the 6.8 per cent in 2018 “for idiosyncratic reasons, but is expected to recover in 2020”.

The reduction in India’s growth projection for this year “reflects a weaker-than-expected outlook for domestic demand”, WEO said.

India’s future “growth will be supported by the lagged effects 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”, it added.

In the medium term, the IMF expects India’s growth to stabilise at about 7.3 per cent, based on continued implementation of structural reforms.

The IMF suggested that India should use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence.

Indo-Asian News Service