Asit Ranjan Mishra
New Delhi: The International Monetary Fund on Tuesday revised downward India’s growth forecast for 2019-20 by 30 basis points to 7%, as it sees weaker domestic demand. In April, it had revised India’s growth projection by 20 basis points.
Over the last month, the Reserve Bank of India (RBI) as well as the chief economic adviser in the finance ministry Krishnamurthy Subramanian and the Asian Development Bank have also revised downward their growth projections for India to 7%.
“India’s economy is set to grow at 7% in 2019, picking up to 7.2% 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 to the World Economic Outlook (WEO) released in April.
Gross domestic product (GDP) growth in India in the fourth quarter of 2018-19 slowed down more than expected to 5.8% from 6.6% in the previous quarter on the back of slowing investment and consumption demand. This was the lowest quarterly GDP growth rate in five years. Annual GDP growth in 2018-19 fell to 6.8% from 7.2% in 2017-18.
IMF said the recent softening of inflation across emerging markets and developing economies, gives central banks the option of becoming accommodative, “especially where output is below potential and inflation expectations are anchored.”
Last month, RBI cut policy rates for the third consecutive time by 25 basis points and changed its stance to accommodative from neutral, signalling that more rate cuts were in store to revive growth and support faltering consumer demand. With retail inflation at 3.18% in June, most analysts expect RBI to cut policy rates for the fourth consecutive time in its policy review on 7 August.
IMF revised downward its growth projections for China as well as for the world by 10 basis points each to 6.2% and 3.2% respectively for 2019. “In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt,” IMF said.
“The revision for 2019 reflects negative surprises for growth in emerging market and developing economies that offset positive surprises in some advanced economies,” IMF chief economist Gita Gopinath said in a statement.
“Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted. Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased,” Gopinath said.
US-China trade negotiations broke down in May, prompting the US to increase the tariff rate on $200 billion worth of imports from China to 25% from 10%. It also threatened tariffs on another $300 billion worth of Chinese imports and imposed restrictions on doing business with the Chinese telecommunications giant Huawei. China retaliated by raising tariff rates on $60 billion worth of US imports.
The IMF said downside risks have intensified since the April 2019 outlook and risks to its forecasts are mainly to the downside. “They include escalating trade and technology tensions, the possibility of a protracted risk-off episode that exposes financial vulnerabilities accumulated over years of low interest rates, geopolitical tensions, and mounting disinflationary pressures that make adverse shocks more persistent,” it added.
It said multilateral and national policy actions are vital to place global growth on a stronger footing. “The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements. Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms,” it added.
The IMF said while monetary policy remains accommodative, fiscal policy should balance multiple objectives such as smoothening demand as needed, protecting the vulnerable, bolstering growth potential with spending that supports structural reforms, and ensuring sustainable public finances over the medium term. “If growth weakens relative to the baseline, macroeconomic policies will need to turn more accommodative, depending on country circumstances. Priorities across all economies are to enhance inclusion, strengthen resilience, and address constraints on potential output growth,” it added.