IMF retains economic growth projection for India at 7.3% for FY19

Echoes RBI on exchange rate intervention, but differs on rate tightening

The International Monetary Fund (IMF) on Monday retained economic growth projection for India at 7.3 per cent for 2018-19 (FY19), lower than the government’s and the Reserve Bank of India’s (RBI’s) forecasts. This is, however, noteworthy as the IMF cut global growth projections by 0.2 percentage points.

In its World Economic Outlook (WEO), the IMF said foreign exchange interventions should be limited to address disorderly market conditions, something which RBI Governor Urjit Patel also talked about. The IMF wants the RBI to tighten monetary conditions, something which it did not do in the October policy review. 

For the next year (FY20), the IMF lowered India’s growth projections by 0.1 percentage points to 7.4 per cent. 

As such, the IMF does not see India’s growth reaching 7.5 per cent even in FY19. However, the RBI pegged India’s growth projections at 7.5 per cent. The government expected the rate to exceed 7.5 per cent this year on the back of 8.2 per cent growth rate in the first quarter. India’s economy grew 6.7 per cent in FY18.

India will continue to be the fastest-growing major economy as China’s growth projection was retained by the IMF at 6.6 per cent for FY19. For FY20, the Chinese economic growth rate was cut by 0.2 percentage points to 6.2 per cent. 

The IMF releases its annual WEO ahead of its meeting with the World Bank. This year, the meeting is being hosted in Bali, Indonesia, since Friday. 

The IMF said its forecast for investment growth for FY19 is weaker than in April, despite higher capital spending in India, on account of contracting investment in economies under stress, such as Argentina and Turkey, which is also reflected in a downward revision for import growth.

Acceleration in the growth rate from 2017-18 reflects a rebound from transitory shocks (the currency exchange initiative and implementation of the goods and services tax), with strengthening investment and robust private consumption, the IMF said. India’s medium-term growth prospects remain strong at 7.75 per cent, benefitting from ongoing structural reform, but have been marked down by just under 0.5 percentage point relative to the April 2018 WEO, the IMF said. 

It said reform priorities in India include reviving bank credit and enhancing the efficiency of credit provision by accelerating the clean-up of bank and corporate balance sheets and improving the governance of public sector banks.

It also said renewed impetus to reform labour and land markets, along with further improvements to the business climate, are crucial. The IMF talked about continued capital outflows from emerging market economies and pressure on exchange rates because of monetary normalisation in the US. 

“Under floating exchange rate regimes, foreign exchange interventions should be limited to addressing disorderly market conditions while protecting reserve buffers,” it said.

On monetary policy, the IMF said it should be tightened to anchor expectations where inflation is expected to pick up, say in India. It said core inflation (excluding all food and energy items) in India had risen to about 6 per cent as a result of a narrowing output gap and pass-through effects from higher energy prices and exchange rate depreciation.

The IMF said a high interest burden and risks from rising yields in India also require continued focus on debt reduction to establish policy credibility and build buffers.