Insights into Editorial: Bumps ahead: On IMF’s India growth forecast

Context:

In its latest World Economic Outlook report, the IMF has pared global growth hopes for 2022 from 4.4% projected in January, to just 3.6%, a sharp decline from the estimate of 6.1% for 2021.

The International Monetary Fund projected a “fairly robust” growth of 8.2 per cent for India in 2022, making it the fastest-growing major economy in the world, almost twice faster than China’s 4.4 per cent.

Global GDP Growth:

1. The global growth has been projected at 3.6 per cent in 2022, down from 6.1 per cent in 2021.
2. The IMF’s projection of global growth at 3.6 per cent in 2022 and 2023 is 0.8 and 0.2 per cent lower than in the January forecast, respectively.
3. The downgrade largely reflects the war’s direct impacts on Russia and Ukraine and global spillovers.
4. For other countries, IMF has projected GDP growth for Brazil at 0.8 per cent, Mexico at 2 per cent, Germany at 2.1 per cent, Italy at 2.3 per cent, France at 2.9 per cent, Japan at 3.3 per cent, UK at 3.7 per cent, Canada at 3.9 per cent, and Spain at 4.8 per cent.
5. Observing that the overall risks to economic prospects have risen sharply and policy trade-offs have become even more challenging.
6. This crisis unfolds at a time when the global economy was on a mending path and was recovering from the Covid-19 pandemic.

Volatile yet sharp commodity prices and supply chain disruptions:

1. The invasion of Ukraine has significantly dampened post-COVID recovery prospects, with the IMF highlighting volatile yet sharp commodity prices and supply chain disruptions.
2. Fresh pandemic-driven lockdowns in China’s key manufacturing and trade hubs also compound supply worries and could slow its own growth from 4.8% to 4.4% this calendar year.
3. India’s growth through 2022-23, which the IMF had pegged at 9% in January, has now been projected at 8.2% — lowered by the same extent as overall global growth.
4. This headline number is more optimistic than projections from the World Bank (8%), the ADB (7.5%) and the RBI (7.2%).
5. In 2023-24, however, the IMF expects growth to slip to 6.9%, while the World Bank expects it to be at 7.1%.
6. The IMF has emphasized that these projections are much more uncertain than usual due to the ‘unprecedented nature of the shock’ to the world economy.
7. Growth could slow much more while inflation could turn out higher than expected.
8. The multilateral lender expects India’s retail inflation to now average above the RBI’s tolerance threshold at 6.1% and the current account deficit to touch 3.1% this fiscal year.

India’s Economy to Rebound as Pandemic Prompts Reforms:

India’s economy is poised for a rebound after enduring a second wave of COVID-19 infections this year that further constrained activity and took a heavy toll on its people.

India’s broad range of fiscal, monetary and health responses to the crisis supported its recovery and, along with economic reforms, are helping to mitigate a longer-lasting adverse impact of the crisis, according to the latest annual review.

Though policy steps helped mitigate the pandemic, it’s still likely to result in greater poverty and inequality. And the path of recovery will follow the path of the virus.

New infections have fallen significantly and vaccination rates have risen to surpass a billion doses, although another resurgence is not impossible even if it seems unlikely today.

There’s a lot of uncertainty about COVID. We cannot rule out future waves.

Factors for lowering of India’s growth trajectory:

1. The chief factors cited by the IMF for lowering India’s growth trajectory include higher oil prices, inflation that would exacerbate weak domestic demand, and the likelihood of a drag on net exports.
2. The World Trade Organisation has lowered its 2022 global merchandise trade growth forecast to just 3% from 4.7% projected earlier.
3. This means a critical operating growth engine, which manifested in the record $420 billion exports in 2021-22, could sputter.
4. A corollary risk from higher food and fuel prices in emerging economies is heightened social unrest, and the IMF has noted that ordinary families’ budgets are being strained to the breaking point.
5. While IMF has mooted decisive actions from central banks to stem inflation worries, IMF has also warned that monetary policy tightening would raise debt servicing costs and put many low-income countries in distress.

Way Ahead: Need to focus on supply side reforms:

Another distinguishing feature of India’s economic response has been an emphasis on supply-side reforms rather than a total reliance on demand management.

These supply-side reforms include deregulation of numerous sectors, simplification of processes, removal of legacy issues like ‘retrospective tax’, privatization, production-linked incentives and so on.

Even the sharp increase in capital spending by the Government can be seen as both demand and supply response as it creates infrastructure capacity for future growth.

Two common themes in India’s supply-side strategy:

Reforms that improve flexibility and innovation in order to deal with the long-term unpredictability of the post-Covid world.

1. This includes factor market reforms; deregulation of sectors like space, drones, geo-spatial mapping, trade finance factoring;
2. Process reforms like those in government procurement and in telecommunications sector; removal of legacy issues like retrospective tax; privatization and monetization, creation of physical infrastructure, and so on.

Reforms aimed at improving the resilience of the Indian economy. These range from climate/environment related policies;

Social infrastructure such as public provision of tap water, toilets, basic housing, insurance for the poor, and so on;

1. Support for key industries under Atmanirbhar Bharat; a strong emphasis on reciprocity in foreign trade agreements, and so on.
2. Some commentators have likened the Atmanirbhar Bharat approach to a return to old school protectionism.
3. Far from it, the focus on economic resilience is a pragmatic recognition of the vagaries of international supply-chains.

Conclusion:

Indian policy makers need all hands-on deck and undivided attention to cope with the multiple headwinds, which include the need to smoothen interest rate hikes, spur consumption, manage fragile fiscal math and currency fluctuations amid volatile foreign capital flows.

It would be equally critical to devise a medium-term action plan to minimize the scarring effects of this ‘crisis upon a crisis’, as the IMF expects employment and output to persist below pre-COVID trends till as far as 2026, amid a further dip in global growth after 2023.