IMF revises India growth forecast, sees GDP shrinking at sharper 8% in FY21

Expects economy to grow 11.5% next year, which could slightly correct govt's fiscal mathematics

The International Monetary Fund (IMF) has pegged contraction in India's economy at 8 per cent in the current financial year, higher than the 7.7-per cent decline projected by the government's advance estimates. However, the international organisation expects a growth rate of 11.5 per cent in the next financial year before slowing to 6.8 per cent in 2022-23, making India regain the tag of the fastest-growing large economy in the world in both the years.

In the World Economic Outlook released on Tuesday, the IMF said the second-quarter (Q2) gross domestic product numbers for India surprised it on the upside. India’s economy fell by 7.5 per cent in the quarter, while most experts had expected the contraction to be in double digits. The Fund was also surprised by the growth numbers for Australia, the euro area, Japan, Korea, New Zealand, Turkey, and the United States for Q2.

The IMF had earlier expected India's GDP to decline by 10.3 per cent in FY21. However, the second-quarter numbers helped it revise the projection. The IMF had also projected the economy to grow by 8.8 per cent in FY22, but now it has revised it up by 2.7 percentage points.

The growth numbers for the next financial year may have implications for the Budget, which will be tabled in Parliament in less than a week. The Budget assumes economic growth at current prices which has an inflation component in it. If it also projects the economy to grow by 11.5 per cent and assumes the inflation rate (called deflator in the GDP methodology) of 3.5 per cent (which was projected by the advance estimates for 2020-21), GDP growth would be 15 per cent for the next financial year. Then all the important numbers such as tax collection, fiscal deficit and revenue deficit would be calculated from this. The 15 per cent growth would mean robust tax collection, albeit the fiscal deficit still remains high as the government might go for high capex to revive the economy. Expenditure on health may also add to the expenditure side.

Spain, the UK, Italy, and France were projected by the IMF to witness a sharper contraction in the economy than India's.

The IMF projected the global growth contraction for 2020 at 3.5 per cent, 0.9 percentage point less than projected in the previous forecast, reflecting stronger-than-expected momentum in the second half of 2020.

It said although recent vaccine approvals had raised hopes of a turnaround in the pandemic later this calendar year, renewed waves and new variants of the virus posed concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5 per cent in 2021 and 4.2 per cent in 2022. The 2021 forecast is revised up 0.3 percentage points relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

"The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors," it said.

The projection for the global growth could be raised if further favourable news on vaccine manufacture (including on those under development in emerging market economies), distribution, and effectiveness of therapies could increase expectations of a faster end to the pandemic than assumed in the baseline, boosting confidence among firms and households, it said.