IMF retains India's growth forecast at 7.5% for FY17

India is expected to grow at 7.5 per cent in FY17, underpinned by strong domestic consumption, which has benefited from lower energy prices, says the International Monetary Fund (IMF) in its Regional Economic Outlook: Asia and Pacific. The government's push to boost capital spending could help crowd in private sector investments, which will help broad-base the recovery, it added.

The IMF lowered its growth forecast for the Asia-Pacific region to 5.3 per cent in 2016-17, marginally lower than the previous estimate of 5.4 per cent. The downgrade reflects the sluggish nature of global recovery, which suggests that export growth is likely to be muted. As such growth in the region is likely to be driven largely by domestic consumption demand aided by lower commodity prices. The aggregate growth numbers might be adversely affected as the IMF predicts the Chinese and Japanese economies to slow sharply over the next two years.

Particularly worrying is the slowing down of the Chinese economy, especially economies which are closely integrated with the Chinese supply chains. But those who are exposed to China's consumption demand may benefit, as the country attempts to rebalance its economy towards domestic consumption. "Asia remains the most dynamic part of the global economy but is facing severe headwinds from a still weak global recovery, slowing global trade, and the short-term impact of China's growth transition," said the IMF.

While India will remain as the fastest-growing economy in the world, there are several reasons to worry. For one, as the IMF points out, weak exports, courtesy sluggish global growth and sluggish credit growth, in part a consequence of stressed bank and corporate sector balance sheets "will continue to weigh on the economy." With the Reserve Bank of India forcing banks to recognise the true extent of bad loans in the system, bank profits, especially in the public sector unit (PSU) segment, have come under stress, as they make provisions to deal with the bad loans. This puts pressure on PSU banks to raise capital. Though the government has allocated Rs 25,000 crore in the Budget for this purpose, analysts believe this may simply not be enough. In fact, even the IMF warns that despite exceeding regulatory requirements, Tier-I capital levels are relatively lower in India and China.