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IMF cuts India’s GDP growth forecast to 7.3% for FY20

FE Bureau
IMF, India, GDP, growth forecast, fiscal year, Economy
IMF, India, GDP, growth forecast, fiscal year, Economy

The International Monetary Fund (IMF) on Tuesday trimmed its economic growth forecasts for India by 20 basis points (bps) each from its January predictions to 7.3% for FY20 and 7.5% for the next fiscal. Citing persistent risks from the trade war, it lowered 2019 global growth forecast by 20 basis points to 3.3%, the weakest since 2009 when the subprime crisis had flared up. The Fund also reduced its 2019 trade growth forecast by a sharp 60 basis points to 3.4%, compared with the actual rise of 3.8% in 2018.

The IMF s FY20 growth forecast for India is lower than the World Bank s (7.5%) and the Asian Development Bank s (7.2%). However, at 7.1%, the IMF s estimate of the country s growth in 2018-19 was even 10 bps higher than the second advance estimate by the Central Statistics Organisation. Even as key political parties in India have pledged several populist measures, including minimum income support to the poor and farmers, ahead of general elections, the Fund has prescribed continued fiscal consolidation in the near term to trim the country s elevated public debt. This should be supported by strengthening goods and services tax compliance and further reducing subsidies , it added.

Governance of Indian public sector banks needs to be enhanced and reforms to hiring and dismissal regulations would help incentivize job creation, it said. Nevertheless, it acknowledged important steps that have been taken to strengthen financial sector balance sheets, including through accelerated resolution of non-performing assets under the new insolvency law.

In its latest World Economic Outlook report, the Fund said India s growth is projected to pick up to 7.5% in FY21, aided by the continued recovery of investment and robust consumption amid a more expansionary stance of monetary policy and some expected impetus from fiscal policy . The country s growth is expected to stabilise at just under 7.75% over the medium term, based on continued implementation of structural reforms and easing of infrastructure bottlenecks , it added.

Global growth forecast lowered
The IMF cut the global growth projection for 2019 to 3.3% from 3.5% projected in January, citing risks from increasing trade tensions and tighter monetary policy by the Federal Reserve.

Higher trade policy uncertainty and concerns of escalation and retaliation would reduce business investment, disrupt supply chains, and slow productivity growth, the IMF said. The resulting depressed outlook for corporate profitability could dent financial market sentiment and further dampen growth.

Global growth, which peaked at close to 4% in 2017, dropped to 3.6% in 2018, and is projected to fall further to 3.3% in 2019. Although a 3.3% global expansion is still reasonable, the outlook for many countries is very challenging, with considerable uncertainties in the short term, especially as advanced economy growth rates converge toward their modest long-term potential, it added.