International Monetary Fund Further Reduces India’s Growth Forecast

The International Monetary Fund (IMF) revised India’s growth forecast on Monday. It is now projected to grow at 4.8% in the current fiscal, and it is estimated to grow at 5.8% in 2020-21. Several agencies have revised India’s growth projection recently. 

The IMF said that the slump in India’s growth forecast has bearings on the global front. The IMF gave an update on the World Economic Outlook and reduced the growth forecast for the entire Aisa from October’s projection.

The downward correction is majorly due to slowdown in India’s growth. The non-banking financial sector crisis has made consumption and demand fall to record levels in the country. This has paved the way to a decrease in credit growth as well. 

However, India is expected to grow at a rate of 6.5% in 2021-22 and 5.8% in 2020-21. The IMF’s projections of improved growth rate in the next two fiscals are expected to be bolstered by suitable monetary policies and actions from the government. Also, subdued oil prices are anticipated to boost the IMF’s projections.

The current fiscal’s projection by the IMF is somewhat higher than what Fitch, an American credit rating agency, estimated. However, it is lower than what the United Nations, the Reserve Bank of India (RBI), and the World Bank estimated. 

IMF feels that global growth will also be impacted due to a slump in India’s growth. This is because India plays a crucial role in the global economy. India is a developing country, and as per IMF, its economy is fifth largest in the world by GDP. 

Global growth is estimated to rise at 3.3% in 2020, up from 2.9% in 2019. It is further expected to increase to 3.4% in 2021, which is a downward revision of 0.1% points for 2020 and 2019, and 0.2% point for 2021 as against those in the October’s World Economic Outlook.

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The downward revision majorly indicates adverse impacts on economic activities in emerging nations, especially India. This opened up the need to reassess growth projections for the next two years. 

With the most recent projection, India will become the fastest growing economy only in 2021-22. This delay can hamper the Indian Prime Minister’s ambition of realising a 5 trillion dollar economy by the year 2024.

As per the estimation of the IMF, China grew at a rate of 6%, down from 6.1% in 2019 and is expected to grow at 5.8% in 2021. This downgrade in Chinese growth is significantly due to the trade war with the United States.

The much-anticipated removal of tariffs and hikes on tariffs as part of the phase-1 deal between China and the United States is predicted to shoulder the near-term weakness. This might have possibly caused the upgrade of 0.2% points in China’s growth forecast as against October’s World Economic Outlook. 

IMF is still wary of the unsolved Sino-American trade issues. The economic activities in China and the strengthening of the domestic financial regulatory is significantly dependent on the economic relations between the two economic powerhouses.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in