IMF slashes India’s growth forecast for FY20 due to weaker demand

In another downturn for India, the International Monetary Fund (IMF) has further trimmed the annual growth forecast for an economy that is vying to reach the figure of $5 trillion. The IMF also revised projection for global growth to 3.2% in 2019 and 3.5% in 2020.

The IMF expects weaker domestic demand that will, in turn, restrict an economic turnaround. The IMF has now projected the Indian economy to grow by 7% in the financial year ending in 2020.

In April, the IMF had projected a growth rate of 7.3% and now has slowed down by 0.3%. The growth is expected to gain momentum of 0.2% in the following year i.e. 2020. Downside risks have intensified since the April 2019 World Economic Outlook (WEO) and risks to its forecasts are mainly to the downside, said the WEO update.

“The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand,” IMF said on Tuesday in its update to the WEO. Recently concluded general elections and associated uncertainties, where Prime Minister Narendra Modi gained the power again have been partly a reason for the broad-based slowdown in consumption and investment demand in India. Tightening of borrowing conditions for small and medium enterprises, releasing the report in Chile’s capital Santiago, IMF’s Indian-origin Chief Economist Gita Gopinath said, “However, we expect some of that to improve in the near term. That, along with a more accommodative monetary policy and fiscal policy of the Indian government, should remove some of the downside risks.”

Gross domestic product growth in India in the March quarter slowed more than expected to 5.8% from 6.6% in the December quarter. This was the slowest quarterly GDP growth in five years. Annual GDP growth slowed to 6.8% in the year ended 31 March from 7.2% in the previous year.

It is worth noting that since last month, the Reserve Bank of India (RBI), the Economic Survey of the finance ministry, and the Asian Development Bank have cut their growth outlook for India to 7%. With retail inflation at 3.18% in June, most analysts expect RBI to cut interest rates for the fourth consecutive time in its policy review on 7 August.

Global Effect

 “In China, the negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in the midst of a structural slowdown and needed regulatory strengthening to rein in high dependence on debt,” IMF said.

Gopinath said global growth is sluggish and precarious, as some of these are self-inflicted. “Dynamism in the global economy is being weighed down by prolonged policy uncertainty as trade tensions remain heightened despite the recent US-China trade truce, technology tensions have erupted threatening global technology supply chains, and the prospects of a no-deal Brexit have increased,” she said.

“They include escalating trade and technology tensions, the possibility of a protracted risk-off episode that exposes financial vulnerabilities accumulated over years of low-interest rates, geopolitical tensions, and mounting dis-inflationary pressures that make adverse shocks more persistent,” it said.

IMF said multilateral and national policy actions are vital to placing global growth on a stronger footing. “The pressing needs include reducing trade and technology tensions and expeditiously resolving uncertainty around trade agreements. Specifically, countries should not use tariffs to target bilateral trade balances or as a substitute for dialogue to pressure others for reforms,” it said.

Leave a Reply

Your email address will not be published. Required fields are marked *