The International Monetary Fund (IMF) on Tuesday retained its global growth prediction but surprisingly raised its forecasts of global trade by a decent 50 basis points (bps) for 2018 and 30 bps for the next year from the levels it expected in January, despite a looming trade war between the US and China. Although the IMF flagged risks from “inward-looking policies” of some countries to trade prospects, the higher forecasts on the basis of a rebound in investments suggest it still believes the trade war may not spiral out of control, plunging the world into a broader crisis. As for India, the IMF’s report, released in the wake of a $2-billion fraud at Punjab National Bank, calls for a broader package of financial reforms, along with recapitalisation, to improve the governance of public sector banks and strengthen banks’ debt recovery mechanisms.
The multilateral body cited India’s “high public debt and a recent failure to achieve the budget’s deficit target” to call for continued fiscal consolidation into the medium term to “further strengthen fiscal policy credibility”. The Indian government has pegged FY18 fiscal deficit at 3.5% (revised estimate), although the final estimate would most likely be 3.4% — still higher than the target of 3.2%. For FY19, the target is fixed at 3.3% instead of 3% aimed for earlier. Finance minister Arun Jaitley has said that most of the fiscal deficit slippage of 30 bps from the target for FY18 would have been bridged had the government factored in a full-year goods and services tax collection, instead of that of 11 months following the introduction of a new accounting system.
Nevertheless, the IMF has acknowledged structural reforms undertaken by India in recent years and projects higher growth for the country for this year and the next. India will again emerge as the world’s fastest-growing major economy at least for the next two years, the IMF said, retaining its earlier forecasts. India’s growth will rise steadily to 7.4% for 2018-19 and 7.8% for the year after, against 6.7% in the current fiscal, the multilateral body said. However, China’s expansion will slow to 6.6% and 6.4% for 2018 and 2019, respectively, against 6.9% in 2017.
“Over the medium term, (India’s) growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivize private investment,” the IMF report said. The IMF said an investment recovery in advanced economies, continued strong growth in emerging Asia, a notable upswing in emerging Europe, and signs of recovery in several commodity exporters have bolstered chances of trade growth in 2018 and 2019. Global economic growth forecast has been retained at 3.9% for 2018 as well as 2019. Higher projections for the US and the European Union in 2018 are going to be offset by lower-than-expected expansion across many countries, especially in West Asia and North Africa.
The IMF has revised up the prediction for the US by 20 bps from the January forecast to 2.9% for 2018, against 2.3% last year. It has raised its projection for the EU by 20 bps to 2.4% for 2018. This, along with higher-than-expected growth rates for key markets like the US and the EU, should help India, which has been struggling to achieve high and sustained growth in merchandise exports in recent years.