India remains a bright spot in IMF’s global economic forecast

IMF retained India’s growth forecast for 2016-17 at 7.5% but lowered global growth forecast to 3.2% in 2016

India continues to remain a bright spot in the otherwise bleak global economic forecast of the International Monetary Fund (IMF). India will be the fastest growing major economy in 2016-17 growing at 7.5%, ahead of China, at a time when global growth is facing increasing downside risks, as per the World Economic outlook released by the IMF.

The April 2016 World Economic outlook titled ‘Too slow for too long’ retained India’s growth forecast while lowering global growth projections pointing out that volatility in financial markets and non-economic risks posed by migration and terrorism are increasing risks of a derailed recovery.

The world economy will grow at 3.2% in 2016 and 3.5% in 2017, IMF said, lowering its earlier projection by 0.2 and 0.1 percentage points respectively. It also marginally increased its growth projections by 0.2% percentage points for China to 6.5% and 6.2% in 2016 and 2017 respectively citing resilient domestic demand.

“Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long,” said Maurice Obstfeld, economic counsellor at the IMF.

“With its downside possibilities, the current diminished outlook calls for an immediate, proactive response. To repeat: there is no longer much room for error. But by clearly recognizing the risks they jointly face and acting together to prepare for them, national policymakers can bolster confidence, support growth, and guard more effectively against the risk of a derailed recovery,” he said.

IMF said global growth will strengthen from 2017 aided by the gradual increase in the global weight of fast-growing countries such as China and India.

India’s growth will continue to be driven by private consumption, which has benefited from lower energy prices and higher real incomes, IMF said, adding that “With the revival of sentiment and pickup in industrial activity, a recovery of private investment is expected to further strengthen growth.”

India expects to grow in a wide range of 7-7.75% in 2016-17 as against a projected 7.6% growth in 2015-16.

IMF, however, flagged the slowing trade growth as one of the risk factors to growth.

“Growth in China and India has been broadly in line with projections, but trade growth has slowed down noticeably. The trade slowdown is related to the decline in investment growth across emerging market economies, which reflects rebalancing in China but also the sharp scaling down of investment in commodity exporters, particularly those facing difficult macroeconomic conditions,” it said.

Though India has benefitted from falling global oil prices given its status as a net importer of crude oil, its trade balance has not improved much, given that Indian exports have been contracting for 15 consecutive months.

IMF stressed the need for India to continue with fiscal consolidation through revenue reforms and further reduction in subsidies. “Sustaining strong growth over the medium term will require labour market reforms and dismantling of infrastructure bottlenecks, especially in the power sector,” it added.

IMF said India’s inflation based on the consumer price index is projected to be around 5.3% in 2016 though there are upside risks like an unfavourable monsoon and expected public sector wage increase consequent to the recommendations of the seventh pay commission.

“In India, lower commodity prices, a range of supply-side measures, and a relatively tight monetary stance have resulted in a faster-than-expected fall in inflation, making room for nominal interest rate cuts, but upside risks to inflation could necessitate a tightening of monetary policy,” it said.

IMF’s growth predictions are largely in line with projections made by other global agencies. Last month, Asian Development Bank, in its annual outlook report said India will grow at 7.4% in 2016-17, marginally lower than the 7.6% in 2015-16. Global rating agency Fitch was more optimistic about India’s growth prospects, projecting a 7.7% growth in 2016-17.