IMF lowers India's growth projection to 6.1%

The International Monetary Fund (IMF) on Monday cut India’s economic growth estimate from 6.8 per cent to 6.1 per cent in 2012, as external demand slowed down and domestic demand decelerated. It attributed the slow domestic demand to capacity constraints and monetary tightening by the Reserve Bank of India (RBI).

The conditions are not expected to become favourable substantially in 2013, this prompted the Fund to scale down the 2013 gross domestic product (GDP) growth as well to 6.5 per cent from 7.2 per cent estimated earlier.

“Growth momentum has slowed in various emerging market economies, notably Brazil, China, and India,” IMF said in its World Economic Outlook Update.

DECELERATING GROWTH          (%)
GDP Growth projection (2012-13)	Latest  estimate	Earlier  estimate
IMF*	6.1	6.8
ADB	6.5	7.0
World Bank	6.9	7.0-7.5
PMEAC	NA	7.5-8.0
Finance Ministry	NA	7.6
ADB: Asian Development Bank;  PMEAC: Prime Ministers’ Economic Advisory Council  * 2012 calender year Source: IMF, ADB, WB, PMEAC, Budget 2012-13

 

This partly reflected a weaker external environment, but domestic demand had also decelerated sharply in response to capacity constraints and policy tightening over the past year, the update said.

Many emerging market economies had also been hit by increases in investor-risk aversion and perceived growth uncertainty, which led not only to equity price declines, but also to capital outflows and currency depreciation, the Fund added.

IMF uses different methodology to measure economic growth against the official Indian method. While India bases economic growth at real GDP at factor cost (excluding indirect taxes), IMF estimates it at GDP at market prices (including indirect taxes).

The Budget had assumed India’s eocnomic growth to be 7.6 per cent in 2012-13 against 6.5 per cent last financial year. However, various statements by Prime Minister Manmohan Singh and his policy advisers have now put the economic growth in a range of 6.5-7 per cent.

The latest IMF data comes close to similar observation implied by official data on merchandise trade. While exports contracted around five per cent in June, 2013 year-on-year, imports declined more than 13 per cent, indicating demand was low, both in abroad and domestic markets. For two straight months this financial year, exports and imports declined.

Also, industrial production grew just 2.4 per cent in May, against contraction in April.

Last week, Asian Development Bank, too, scaled down projection for India’s economic growth rate to 6.5 per cent for this financial year, against seven per cent estimated earlier.

IMF said downside risks to growth in emerging markets and developing economies seem primarily related to external factors in the near term.

“The slowdown in emerging market growth since mid-2011 has been partly the result of policy tightening. But policies have been eased since, and this easing should gain traction in the second half of 2012,” the Fund said.

RBI eased policy rates by 50 basis points in its annual monetary policy for 2012-13, but kept the rates unchanged in the next review. It is slated to come out with another review later this month.