The International Monetary Fund (IMF) on Tuesday lowered its growth forecasts for India for the current fiscal year and the next by 20 bps and 50 bps, to 5.9% and 6.3%, respectively.
This was broadly in line with the cuts in its global growth forecasts for 2023 and 2024 by 10 bps each to 2.8% and 3%, but indicated that India may not be weathering the global turmoil as exceptionally as it was expected to. Of course, India will still be the fastest growing major economy during the forecast period.
Notably, the IMF’s latest projection widens the gap between its forecast and that of the Reserve Bank of India for the current year. The central bank, in the monetary policy review last week, had marginally upped its GDP growth forecast for India to 6.5% for FY24 from 6.4% previously. Also, at 5.9%, the IMF’s forecast is the lowest growth estimate for India for this year among the major agencies (see graph).
Global growth, according to the IMF, is expected to fall from 3.4% in 2022 to 2.8% in 2023 before recovering partially to 3% in 2024. The projections for 2023 and 2024 are 10 bps lower than the IMF’s January forecast.
The IMF revised upwards its growth forecast for the US by 20 bps to 1.6% in 2023 and for the Euro Area by 10 bps to 0.8%. China’s growth rate is projected to be 5.2% in 2023 and 4.5% in 2024 against its growth rate of 3% in 2022.
Tentative signs in early 2023 that the world economy could achieve a soft landing—with inflation coming down and growth steady—have receded amid stubbornly high inflation and recent financial sector turmoil, the IMF said in the new edition of its World Economic Outlook.
“On the surface, the global economy appears to be poised for a gradual recovery from the powerful blows of the pandemic and Russia’s unprovoked war on Ukraine. China is rebounding strongly following the reopening of its economy. Supply-chain disruptions are unwinding, while the dislocations to energy and food markets caused by the war are receding, said IMF Chief Economist Pierre-Olivier Gourinchas.
“Simultaneously, the massive and synchronous tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back toward its targets.
Recently, the World Bank and Asian Development Bank lowered their growth projections for India for the current fiscal citing concerns over slower consumption growth and elevated inflation amid global uncertainties. While the World Bank has pegged the economy to grow at 6.3% this fiscal, the ADB expects it to grow by a notch higher at 6.4%. Most agencies expect GDP to grow at a more subdued 6% or so in the current fiscal.
As per the second advance estimate by the National Statistical Office, India’s economy likely grew 7% in real terms in 2022-23. The IMF, however, reckons that the country’s GDP grew only by 6.8% last fiscal.
The IMF expects inflation in India to ease to 4.9% this fiscal from 6.7% last fiscal and cool further to 4.4% in FY25. In its January forecast the IMF had estimated headline inflation to ease to 5% in the current fiscal and then to 4% in 2024-25. It expects India’s current account deficit to fall to 2.2% in FY24 from 2.6% last fiscal.
“The global economy is yet again at a highly uncertain moment, with the cumulative effects of the past three years of adverse shocks—most notably, the Covid-19 pandemic and Russia’s invasion of Ukraine—manifesting in unforeseen ways,” the IMF said, adding that with the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened.
The unexpected failures of two specialised regional banks in the US in mid-March 2023 and the collapse of confidence in Credit Suisse have roiled financial markets, with bank depositors and investors re-evaluating the safety of their holdings and shifting away from institutions and investments perceived as vulnerable, it further noted.
It also stressed that the world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic.
“Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability,” the report warned. The IMF expects global headline inflation to decline to 7% in 2023 from 8.7% in 2022.
