Omicron effect: IMF cuts India's GDP forecast for FY22 to 9% from 9.5%

The International Monetary Fund on Tuesday cut its FY22 gross domestic growth product (GDP) forecast for India to 9 per cent from 9.5 per cent predicted in October, citing disruptions due to the Omicron wave of the Covid-19 pandemic.

The multilateral agency, however, raised the country’s GDP projection for FY23 to 9 per cent from 8.5 per cent earlier and to 7.1 per cent from 6.6 per cent for FY24. In its latest World Economic Outlook report, the IMF also cut its global growth forecast for calendar year 2022 to 4.4 per cent from 4.9 per cent projected in the last WEO report in October.

“Among prominent revisions not due to the pandemic, India’s prospects for 2023 (FY24) are marked up on expe­cted improvements to credit growth — and, subsequently, investment and consumption — building on better-than-anticipated performance of the financial sector,” the IMF said.

It said the impact of the third wave was captured in latest projections as the October forecast had already factored in the second wave. On a calendar year basis, it projected India’s GDP growth at 8.7 per cent in 2022 and 6.6 per cent in 2023.

“The global economy enters 2022 in a weaker position than previously expected. As the new Omicron. Covid-19 variant spreads, countries have reimposed mobility restrictions. Rising energy prices and supply disruptions have resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies,” the IMF said in its report.

The ‘Bretton Woods’ institution said global growth was expected to moderate from 5.9 per cent in 2021 to 4.4 per cent in 2022, half a percentage point lower for 2022 than in the October forecast, largely reflecting forecast markdowns for the US and China.

For the US, the IMF has reduced its 2022 GDP forecast by 1.2 percentage points to 4 per cent, on the back of a revised assumption removing the fiscal policy package from the baseline, early withdrawal of monetary accommodation, and continued supply shortages. 

“In China, pandemic-induced disruptions related to the zero-tolerance Covid-19 policy and protracted financial stress among property developers have induced a 0.8 percentage-point downgrade,” the IMF said. It now sees China’s economy to expand 4.8 per cent in 2022.

“Global growth is expected to slow to 3.8 per cent in 2023. Although this is 0.2 percentage point higher than in the previous forecast, the upgrade largely reflects a mechanical pick-up after current drags on growth dissipate in the second half of 2022,” it said.

The agency said elevated inflation was expected to persist for longer than envisioned in its earlier forecasts with ongoing supply chain disruptions and high energy prices continuing in 2022. Assuming inflation expectations stay well anchored, inflation should gradually decrease as supply-demand imbalances wane in 2022 and monetary policy in major economies responds, it added.

“The emergence of new Covid-19 variants could prolong the pandemic and induce renewed economic disruptions. Moreover, supply chain disruptions, energy price volatility, and localised wage pressures mean uncertainty around inflation and policy paths is high,” it said, adding that as advanced economies lift policy rates, risks to financial stability and developing economies’ capital flows, currencies, and fiscal positions may emerge.

The latest report reiterated that need for an effective global health strategy, with the pandemic continuing to maintain its grip, and said worldwide access to vaccines, tests, and treatments was essential to reduce the risk of further dangerous Covid-19 variants. This required increased production of supplies, as well as better in-country delivery systems and fairer international distribution.

“Monetary policy in many countries will need to continue on a tightening path to curb inflation pressures, while fiscal policy — operating with more limited space than earlier in the pandemic — will need to prioritise health and social spending while focusing support on the worst affected,” it said.