IMF pegs India's growth in 2012 at 6.9%

The International Monetary Fund (IMF) has pegged growth in India’s gross domestic product (GDP) for 2012 at 6.9 per cent, scaling down the forecast by 0.1 percentage points, compared to its projection in January. It attributed the moderating growth outlook to policy uncertainty, supply bottlenecks, high interest rates and low external demand.

Escalation of the euro zone crisis and tensions in West Asia were listed as external risk factors to the growth outlook in the IMF’s World Economic Outlook 2012 report. For 2013, it predicted India would grow at 7.3 per cent, suggesting a recovery. It, however, cautioned the room for further monetary easing was constrained in India, as underlying inflation pressures remained, adding there was less fiscal room now, compared to 2007.

 

“Although monetary tightening was appropriately paused in many Asian economies, and cautiously reversed in some, room for further easing is constrained in economies where underlying inflation pressures remain (India, Indonesia, Korea),” said the report.

The Reserve Bank of India on Tuesday cut the repo rate by 50 basis points to eight per cent, but said there would be little room for more cuts. Inflation in India has come down from over nine per cent through 2011 to the current six-seven per cent. Wholesale price index-based inflation stood at 6.89 per cent in March.

The IMF report said policy uncertainty and supply bottlenecks would need to be tackled in the near term to ensure potential growth did not decline. The fragility of the external outlook highlights the need for the region to rebalance growth by strengthening domestic demand sources in the coming years. It emphasised on the need to improve conditions for private investment, including addressing infrastructure bottlenecks and enhancing governance and public service delivery to strengthen domestic demand.

An escalation of the euro area crisis would provide significant downside risks to the outlook. It could lower emerging Asia’s output by 1.25 per cent, relative to the baseline. “For Asia’s open economies, trade would be the most important channel of transmission,” it said. It pegged India’s current account deficit at 3.2 per cent of the GDP for 2012.

Tensions in West Asia would lead to a spike in oil prices. The policy in the region needed to be set with an eye on these risks, the report said. In India and Japan, fiscal consolidation remained a priority to anchor confidence and rebuild room to meet future challenges.

In emerging and developing economies, the pace of fiscal tightening was projected to drop from about 1.25 per cent of GDP in 2011 to less than 0.25 per cent of GDP in 2012, primarily as a result of less ambitious fiscal restraint in some major emerging market economies like India, China and Russia, the report said.

Domestic factors were primarily responsible for the slowdown in India’s growth in 2011, the IMF said. These included deterioration in business sentiment that weakened investment and policy tightening, which raised borrowing costs. On the external front, spillovers from Europe reflected in the slowing exports, it said.