IMF trims India's economic growth forecast to 7.3% in 2018, 7.5% in 2019

The International Monetary Fund (IMF) has trimmed India’s growth projection by 0.1 percentage point for 2018-19 owing to high oil prices and a tight monetary policy regime.

The effect of the twin headwinds on the IMF's projection for 2019-20 was much sharper — 0.3 percentage points.  

Now, the IMF has forecast India will grow by 7.3 per cent in 2018-19 against the earlier estimate of 7.4 per cent. The economy was projected to grow 7.8 per cent by 2019-20 by the Fund earlier, but now the projection stood at 7.5 per cent, according to the World Economic Outlook (WEO) Update, released on Monday.

Even then, the economy would be the fastest-growing one among large nations in 2018-19 and 2019-20.

India's economy grew at a four-year-low of 6.7 per cent in 2017-18.

“India’s growth rate is expected to rise to 7.3 per cent in 2018 (2018-19) and 7.5 per cent in 2019 (2019-20). The projection is 0.1 and 0.3 percentage point lower for 2018 and 2019, respectively, than in the April WEO, reflecting negative effects of higher oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher expected inflation,” the IMF said.

Though the IMF had slightly revised downwards India’s economic growth rate for FY19, its projections are now in sync with what other agencies — the World Bank and Asian Development Bank — have predicted.

It said central banks in key emerging market economies — including Argentina, Mexico, Turkey, India and Indonesia — have raised policy rates, responding to inflation and exchange rate pressures (coupled with capital flow reversals in some cases).

The RBI had hiked the policy rate by 25 basis points in June 2018, for the first time in four and a half years, citing a major upside risk to inflation on the back of high crude oil prices.

The RBI had said there was a 12 per cent increase in the price of Indian crude oils basket, which was “sharper, earlier than expected and seems to be durable”.

The RBI will now come up with its monetary policy in August amid a five-month-high consumer price index inflation rate at 5 per cent and more than a four-year high wholesale price index inflation rate at 5.77 per cent in June.

The 8 per cent growth rate will not be possible for at least two more years — 2018-19 and 2019-20

The cut in India's growth rates comes even as the IMF maintained the world's growth rate at 3.9 per cent for 2018 and 2019 respectively. 

The IMF has scaled down economic growth in Argentina and Brazil, besides India, among emerging market economies.

It, however, said much of the disruption caused by demonetisation and the goods and services tax (GST) was over.

Growth will rise from the 6.7 per cent in 2017-18 as the drag in the currency exchange initiative and the introduction of the GST fades, it said.

This has come when India is eyeing the world’s third-largest economy tag by 2030 after overtaking France as the sixth-largest economy and coming close to the UK in 2017.

On Saturday, Economic Affairs Secretary Subhash Chandra Garg had said, “Eight per cent growth is very much achievable... If we keep that... we can look forward to be an Indian economy of $10 trillion, which would be the third-largest in the world.”

The 8 per cent growth rate will not be possible for at least two more years — 2018-19 and 2019-20 — according to IMF estimates. 

However, even if the economy grows by 7 per cent a year, its gross domestic product may cross $10 trillion by 2030 if inflation remains at least 4 per cent a year and the rupee does not depreciate too much against the dollar.