IMF trims FY22 India growth forecast to 9.5%

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July 28, 2021 5:00 AM

Raises 2021 global trade growth forecast by 130 bps to 9.7%

Commenting on global economic growth, the IMF, however, cautioned that the recovery “is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere”.Commenting on global economic growth, the IMF, however, cautioned that the recovery “is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere”.

The International Monetary Fund (IMF) on Tuesday slashed its FY22 growth forecast for India by 300 basis points (bps), from its April projection, to 9.5%, the sharpest cut for any country, citing the damage caused by the second Covid wave that peaked in May.

For the next fiscal, however, the Fund has raised the growth projection for the country to 8.5% from 6.9%. Its April forecasts hadn’t factored in the impact of the resurgence of Covid infections in India.

While the multilateral body retained its global growth forecast at 6% for 2021, it trimmed its earlier projection by 40 bps for developing countries and raised it by 50 bps for advanced economies. Risks around the global baseline projections are, however, to the downside, it cautioned. Countries lagging in vaccination, such as India and Indonesia, would suffer the most among G20 economies, it added.

The IMF also revised up its predictions of global trade volume growth by a sharp 130 bps for 2021 to 9.7% and 50 bps for 2022 to 7%. India is set to benefit from an expected rise in global trade prospects once its supply side gains traction.

“Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: Those that can look forward to further normalisation of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising Covid death tolls,” the Fund said in its latest World Economic Outlook (WEO) forecast.

The Fund’s India forecast for FY22 is higher than 8.3% predicted by the World Bank but is in sync with some other agencies, including S&P and Moody’s. However, the Reserve Bank of India now expects growth to hit 10.5% in FY22, while chief economic advisor KV Subramanian has said it could be close to 11%, as the economic impact of the second wave has been less than feared.

The cuts in economic growth forecasts for this year were high in case of India, Asean members and Saudi Arabia, while the projections for the UK, Italy and the US have been raised by 170 bps, 70 bps and 60 bps, respectively.

Commenting on global economic growth, the IMF, however, cautioned that the recovery “is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere”.

As for inflation, the multilateral body said recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches. “Inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high,” it said.

However, the Fund expected elevated inflation in some emerging market and developing economies, related in part to high food prices. Nevertheless, central banks “should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics”.

The Fund also warned that slower-than-anticipated vaccine rollout would allow the virus to mutate further. “Financial conditions could tighten rapidly, for instance from a reassessment of the monetary policy outlook in advanced economies in case inflation expectations increase more rapidly than anticipated,” it said. Similarly, a double hit to emerging market and developing economies from “worsening pandemic dynamics and tighter external financial conditions would severely set back their recovery and drag global growth below this outlook’s baseline”.

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