NEW DELHI: The International Monetary Fund (IMF) expects India to retain its recently acquired status as the world’s fastest growing major economy even as it pared the country’s growth forecast for the current fiscal.
A day after the finance ministry said the economy should do a little better this year with at least 7.5% growth, the IMF pegged its estimate at 7.3%, the same as in the previous year. That’s lower than the 7.5% forecast in the July 2015 World Economic Outlook (WEO) Update.
“Growth will benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices,” the IMF said, adding that demand in India is projected to remain strong.
Released ahead of the Fund’s annual meeting later this week, the latest edition of the multilateral lender’s ‘World Economic Outlook–Adjusting to Lower Commodity Prices’ has maintained FY17 forecast at 7.5%. A day earlier, an IMF blog post had been optimistic about the country’s economic prospects.
“With China gradually transitioning into an environment of lower growth, India could durably occupy the top growth spot among large emerging markets,” it had said.
The IMF’s forecast for 2020 sees India occupying the top slot among major economies with a growth rate of 7.7%.
To be sure, the multilateral lender expects both countries to drive global growth in the years ahead. “The gradual increase in the global weight of fast-growing countries such as China and India… further increases their importance as drivers of global growth.”
Global economic growth is forecast to slow to 3.1% in 2015, down 0.3 percentage point from the July estimate. Despite recent economic turbulence in China and a global focus on its problems, the IMF doesn’t see a drastic deceleration in the country’s growth, estimating it at 6.8% in 2015 and 6.3% in 2016.
“In an environment of declining commodity prices, reduced capital flows to emerging markets and pressure on their currencies, and increasing financial market volatility, downside risks to the outlook have risen, particularly for emerging market and developing economies,” the IMF document said.
A slower-than-expected 7% growth in the April-June quarter triggered downgrades in India’s growth estimates. Last month, the Reserve Bank of India (RBI) said it expects growth at 7.4% for the year, lower than the 7.6% estimated earlier.
The central bank went on to cut the policy rate by a more than expected 50 basis points to support growth. The government expects this rate cut to revive demand and support growth.
The IMF said India’s near-term growth prospects remain favourable. The narrowing of the current account deficit has lowered external vulnerabilities while the faster-than-expected decline in inflation has created space for interest-rate reductions. It expects inflation to decline further in 2015 because of the drop in global oil and agricultural commodity prices.
The IMF called for continued fiscal consolidation but urged that it should be more growth friendly, tied to tax reform and lower subsidies.
It flagged balance-sheet strains in the corporate and banking sectors while calling for enhanced financial sector regulation, increased provisions and debt recoveries to address the bad loan issue.