International Monetary Fund (IMF) has caused India much heartburn over its negative GDP growth forecast. However, IMF has had to beat hasty retreats recently over its ‘faulty’ forecasts and may well have to do the same in India’s case. On Monday, in a major surprise to many, the IMF took a U-turn on its predictions post the Brexit-vote, where it had stated that the UK economy would grow by 1.1 pc in 2017. However, the IMF economists changed their forecast and predicted that growth would not fall and that UK may well record 1.5pc growth this year. This 0.4% upgrade is the largest revision on a positive scale the IMF has adjusted to in the latest update. Earlier, the IMF also forecast India’s GDP to go down by 100 basis points(bps) to 6.6%. in the financial year 2017 and by 40bps to 7.2% in the Financial Year 2018. This revision forecast by the IMF, if it turns out to be true would let China become the fastest growing economy. Although, it has to be seen whether the IMF backtracks on its predictions about India too, considering its recent retraction-filled history.
The IMF added that the US economy was to grow faster than previously estimated in 2017 and 2018 based on Trump’s tax and spending plans. The IMF forecast an overall growth at 3.4% for 2017 and 3.6% for 2018. It further estimated that a modest fiscal stimulus under Donald Trump would drive US GDP growth to 2.3% in 2017, a growth of 0.1% point on the previous forecast and 2.5% in 2018, which is an increase of 0.4 percentage point. Although the IMF noted that the President-elect’s plans for expansionary fiscal measures which include tax cuts and infrastructure spending could cause inflation.
The IMF in its latest report published on Monday said, “In India, the growth forecast for the current and next fiscal year were trimmed by 1 percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative”. However, the GDP retreat has been called temporary and has been based mostly on the impact of demonetisation. Although, with the impact of the note ban waning, India looks set to reap the windfall of the digital payments adding to the growth of the GDP; a post demonetisation impact, very few have talked about.
This revision of estimation by the IMF comes just after 4 months after it had revised India’s GDP growth in the Financial Year 2017 to be 7.6% in October 2016. It also happens that the IMF”s slashing of growth rates for India is still sharper than the World Bank’s reduction of 60bps in India’s GDP growth to 7% for the FY17. Meanwhile, India’s Central Statistical Office, in it first ever advance estimate stated that the economy might slow down to 7.1% from 7.6% in 2015-16. Although, having a close look at the hit to consumption and investment in the post demonetisation era, analysts believe that these numbers might prove to be an overestimation. Updating its World Economic Outlook, the IMF kept its overall global growth forecasts unchanged from October at 3.4 percent for 2017 and 3.6 percent for 2018, up from 3.1 percent growth in 2016, the weakest year since the 2008-2009 financial crisis.