IMF expects India to grow faster than China by 2016-17

Pegs India's growth at 6.5% in 2016-17, higher than China's 6.3%

The International Monetary Fund (IMF) has slightly cut projections for India's economic growth to 6.3% for 2015-16 against 6.4% made in October last year, while retaining the forecast for the current financial year at 5.6%.

In its World Economic Outlook Update, IMF pegged the country's growth rate at 6.5% for 2016-17.

On a different growth parameter, it projected India'seconomy to grow faster than China's by 2016-17. This methodology includes indirect taxes in gross domestic product and is called GDP at market prices.

On this methodology, India would grow at 6.5% in 2016-17 and China by 6.3% in 2016. However, time period is not strictly comparable as China's growth is for a calendar year and India's for a financial year (April-March).

Nonetheless, if India's economy does expand this way, it is no less an achievement since India's economy grew 5% (GDP at market prices) in 2013-14 against China's 7.8% during 2013. This gap is projected to narrow as India's economy is expected to expand 5.8% in the current financial year compared to 7.4% for China in 2014. For the next financial year, India is forecast to expand 6.3% against China's 6.8% for 2015.

While India's economy was projected to grow at higher rate each year compared to the previous one, China's economy was forecast to grow at less pace.

China's 2015 growth was projected to grow by 0.3 percentage points, less than what was pegged in October by the IMF. The growth for 2016 was expected to slow by 0.5 percentage points. On the other hand, India's growth was slashed by 0.1 percentage points for 2015-16 and retained for 2016-17.

The fund attributed this to decline in investment growth in China in the third quarter of 2014. 

"... leading indicators point to a further slowdown," it said.

The authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth and hence the forecast assumes less of a policy response to the underlying moderation.

However, IMF said the growth forecast is broadly unchanged for India. It said weaker external demand will be offset by lower oil prices and a pickup in industrial and investment activity after policy reforms.

Though the World Bank had also estimated India to grow at 7% by 2017-18 and China by 6.9% in 2017, the two growth rates were not comparable. This was because China's growth was computed on the basis of GDP at market prices and India's at GDP at factor cost (which excludes indirect taxes).

Officially, India estimates its economic growth in terms of GDP at factor cost. Under this methodology, both IMF and the World Bank forecast India's economy to grow by 5.6% in the current financial year. For the next financial year, the World Bank's forecast is 6.4% and that of IMF at 6.3%. For 2016-17, IMF predicted India's growth at 6.5%, 0.5 percentage points lower than the World Bank.

IMF predicted the world economic growth at 3.5% in 2015 and 3.7% the next year. Each of the growth rates was lower by 0.3 percentage points than its October forecast.

US was projected to grow 3.6% in 2015 and 3.3% the next year, higher by 0.5 percentage points and 0.3 percentage points compared to the October projections. The US economy was forecast to grow 2.4% in the just concluded year. US is the largest importers of India's goods.

Eurozone, which is the largest destination of India's merchandise exports, was projected to expand 1.2% in 2015 and 1.4% next year, 0.2 percentage points and 0.3 percentage points slower than what was predicted by the fund in October. It should be noted that the euro zone economy contracted 0.5% in 2013 and was projected to recover to 0.8% growth in 2014.

IMF said lower oil prices due to supply shifts boost global growth, although with important differences between oil importers and exporters. 

"The global economic impact depends crucially on how large and persistent the oil supply shifts are expected to be. The more persistent they are, the more consumers and firms will adjust consumption and production," it said.