Spotlight

New Delhi, 24 October 2015

IMF & WB Signals

INDIA GROWTH FORECAST

By Dr P K Vasudeva

The International Monetary Fund (IMF) cut its prediction for growth in India’s gross domestic product by 0.2 percentage point to 7.3 per cent for the year 2015-16 overtaking China’s growth for the first time since 1999, but left its forecast of 7.5 per cent for the following 12 months unchanged from its most-recent update in July. “Growth will benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices,” the IMF had said in its latest report on the world’s economic outlook (WEO).

The World Bank too has projected India’s growth to accelerate to 7.5 per cent in 2015-16, but added that on the back of significant acceleration of investment, growth could even reach 8.1 to 8.5 per cent in 2017-18. The country is attempting to shift from consumption to investment-led growth, at a time when China is undergoing the opposite transition, the Bank said in its bi-annual South Asia Economic Focus report.

While even the Reserve Bank of India revised its growth forecast to 7.6 per cent in its recent monetary policy review, the Finance Ministry is yet to revise its Budget estimate of 8-8.5 per cent GDP growth. Most multilateral agencies have revised their initial estimates downwards, with credit rating agency Moody’s the most pessimistic among the lot, predicting just 7 per cent growth.

Yet, it would be misleading to interpret the narrative as one of helpless slowdown, with implications of declining investments, lower job creation and rising financial pressure. In fact, the subtext of the IMF forecast is not at all pessimistic. Although the rate of growth is expected to ease off this year, and only recover marginally next fiscal, India will remain the fastest growing major economy in the world this year and the next, outpacing emerging market compatriots by more than 50 per cent. What’s more, the report is upbeat about India’s future, stating that growth will “benefit from recent policy reforms, a consequent pickup in investment, and lower commodity prices”.

The report said that to fuel growth, India should remove infrastructure bottlenecks in the power sector and “implement reforms to education, labour, and product markets to raise competitiveness and productivity.” It also said, New Delhi should overhaul its tax system, reduce the amount of subsidies and introduce market-based pricing of natural resources to boost investment.

The report gave fiscal-year projections for India, while forecasts for other countries were for calendar years. The country’s prospects are a bright spot as growth in other emerging markets slows. The IMF cuts its global growth prediction to 3.1 per cent for 2015, down 0.2-percentage point from its most-recent update in July. It said growth in advanced economies is expected to pick up in 2016, but the expansion in emerging markets and developing economies will slow. It cut its forecast for emerging markets to 4 per cent this year, down 0.2-percentage point from its last update in July. The IMF left its forecast for China’s growth unchanged, at 6.8 per cent for 2015 and 6.3 per cent for 2016.

In further good news for India, the country’s domestic demand is projected to remain strong and inflation looks set to fall in 2015, reacting to a fall in global oil and agricultural commodity prices, the report said. Showing signs of recovery, industrial output rose to nearly 3-year high of 6.4 per cent in August on improvement in manufacturing and capital goods while retail inflation remained with in comfort zone.

The fund offered some advice on monetary policy. Last month, the Reserve Bank of India cut its key interest rate by 0.5 percentage point – more than expected. The fund said a faster-than-expected decline in inflation made space for modest cuts in the nominal policy rate, but said the real policy rate –the rate adjusted for inflation should remain tight for inflation to decline to the target.

As China shifts to a new growth model, the International Monetary Fund chief Christine Lagarde has cautioned that this transformation of the world's second largest economy is expected to be bumpy and not a smooth ride.

It is important to note that the hope is tempered by several caveats. The important one is that China will no longer be driving global growth; this means there will be underutilisation of global capacity for some time, especially in the advanced economies. On the other hand, domestic demand in India is expected to remain robust, calling for a recalibration in the ‘Make in India’ strategy. The IMF has also pointed that hardy perennials such as infrastructure shortages, a power sector crying out for major reforms, the need to revamp India’s complex and growth-inhibiting tax system, as well as structural changes to labour and education will need to be addressed for this potential to be realised. 

T N Ninan chairman and editorial director of Business Standard in his recent book The Turn Of The Tortoise has said, “Most of India has woken up only now to the disillusioning reality that the narrative of 'two Asian giants rising simultaneously' is long past its validity date. By the end of the first decade of the new century, China had annual steel consumption that was more than eight times India's and six times India's car sales. It was building 1000 MW of fresh power capacity every week, compared to 400 MW by India. It accounted for more than 40 per cent of the world's consumption of copper, more than half of the total aluminium, and half also of the skyscrapers being built in the world. Naturally, it was also emitting much greater quantities of greenhouse gases, but India's climate change negotiators (still hostage to the Chindia mindset) decided to make common cause with China”.

Ninan in the end explains – rapid economic growth remains the best foreign policy for India. If India gets its economic act together, it will strengthen its position vis-à-vis China and also provide the ‘balance’ for which other countries look to it. If India falters economically, China will encroach on its space more than it has already — just as a wei qi player would. The prospect of that unpalatable choice should help focus India’s mind more sharply on achieving rapid economic growth.

India should therefore, take steps to introduce second generation economic reforms speedily like implementation of GST Bill, land reforms and infrastructure development by building up good and cordial relations with the opposition and carrying them along as arrogance is not an answer. ---INFA

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