IMF cuts India's GDP growth rate to 7% due to subdued domestic demand

IMF says decision driven by subdued domestic demand; Country remains fastest growing large economy

The International Monetary Fund (IMF) has cut  its projection for India’s economic growth by 0.3 percentage point to 7 per cent for 2019-20 due to subdued  domestic demand. For the next financial year, the projection was also cut by 0.3 percentage point to 7.2 per cent.

“India’s economy is set to grow at 7.0 percent in 2019, picking up to 7.2 percent in 2020. The downward revision of 0.3 percentage point for both years reflects a weaker-than expected outlook for domestic demand,” IMF said in its update on its flagship report -- the World Economic Outlook on Tuesday.

IMF did not give details of muted domestic demand, but various sectors of the economy have been witnessing a slowdown, particularly auto. For instance, retail vehicle sales across the country fell by 5.4 per cent in June year-on-year to 1.64 million units, according to data by the industry body – the Federation of Automobile Dealers  Associations (FADA).

The seven per cent GDP growth forecast for the current financial year is in line with the finance ministry’s projection. 

It should also be noted that the earlier 7.3 per cent projection was made by IMF in April when the second advance estimates had pegged India’s economic growth rate to 7 per cent. However, now the growth rate had come down to 6.8 per cent which has been factored into by IMF.  This means that even the lower GDP growth would not give push to the economic expansion this financial year.

With this only the World Bank has remained the outlier in terms of its projections for economic growth in India. It had projected India’s GDP growth rate at 7.5 per cent for the next three financial year, including the current one.  

Even then, India will continue to be the fastest growing large economy in the world. The closest competitor, in terms of growth – China was projected to grow by 6.2 per cent in 2019 and 6 per cent in 2020 by IMF. Projections for the both the years were cut by 0.1 percentage points from earlier estimates.  China grew 6.6 per cent in 2018.

Increase of India’s GDP growth to 7.2 per cent in 2020-21 would make the economy expand at the same rate as was witnessed in 2017-18. This means it would take three years for the economy to come back to just 7.2 per cent growth.

The Fund also scaled down the global growth rate by 0.1 percentage point each to 3.2 per cent in 2019 and 3.5 per cent in 2020.

It said, ”Global growth remains subdued. Since the April World Economic Outlook (WEO) report, the United States further increased tariffs on certain Chinese imports and China retaliated by raising tariffs on a subset of US imports. Additional escalation was averted following the June G20 summit.”

Global technology supply chains were threatened by the prospect of US sanctions, Brexit related uncertainty and continued, and rising geopolitical tensions roiled energy prices, IMF said.

IMF noted that a number of central banks, including RBI, have turned dovish or communicated a more cautious view on the outlook.  Earlier in June, RBI had cut the repo rate by 25 basis points for the third time in a row.

The Fund said investors now anticipate more significant policy easing from central banks, including in the United States. This supportive environment has helped markets regain their poise. Global share prices have recovered much of the ground lost in May, and market interest rates have continued to decline across a wide swath of economies, it added.