IMF maintains 7.2% India growth forecast for 2018

The International Monetary Fund on Tuesday retained its growth projection for India at 7.2 per cent for 2017-18, while calling for accelerated economic reforms to achieve a higher growth trajectory.

In its biannual World Economic Outlook (WEO), the IMF increased India's growth estimate for 2016-17 to 6.8 per cent from 6.6 per cent estimated in January, saying that economic activity had slowed primarily because of the temporary consumption shock induced by cash shortages and payment disruptions from the demonetisation initiative.

In its January review, the Fund had slashed India's growth estimate to 6.6 per cent for FY17, below China's growth rate for 2016, citing demonetisation disruptions.

IMF has retained its India growth forecast for FY18 at 7.2 per cent and FY19 at 7.7 per cent, well ahead of its forecast for China.

India's statistics department has estimated economic growth in 2016-17 at 7.2 per cent.

The Narendra Modi government announced withdrawal of high-value currency notes on 8 November, the full economic impact of which is yet to be fully ascertained.

The Asian Development Bank (ADB) earlier this month said India's economy is set to grow at 7.4 per cent in 2017-18 against 7.1 per cent the previous year, on the back of a pick-up in consumption demand and higher public investment.

The IMF's projection makes India the fastest growing major economy in 2016-17, with China estimated to have grown at 6.7 per cent during 2016. China's economy is expected to steadily slow down to 6.6 per cent growth in 2017 and 6.2 per cent in 2018 due to the ''complex process of rebalancing'' by reorienting demand from exports and investment in consumption.

The report said India's medium-term growth prospects are favourable, with growth expected to rise to about 8 per cent over the medium term due to implementation of key reforms, loosening of supply-side bottlenecks, and appropriate fiscal and monetary policies.

Inward-looking policies
Global growth has been raised marginally to 3.5 per cent in 2017 from the January estimate of 3.4 per cent due to a ''long-awaited cyclical recovery in investment, manufacturing and trade'' that may take it to 3.8 per cent by 2022, driven by an ''acceleration of activity in India resulting from the implementation of important structural reforms, and a successful rebalancing of China's economy to lower, but still high, trend growth rates.'' (See: World growth to be marginally better than expected at 3.5%: IMF)

The IMF cautioned that inward-looking policies threaten global economic integration and the cooperative global economic order, which have served the world economy, especially emerging market and developing economies, well.

The outlook said India's economy has grown at a strong pace in recent years owing to the implementation of critical structural reforms, favourable terms of trade, and lower external vulnerabilities.

''Beyond the immediate challenge of replacing currency in circulation following the November 2016 currency exchange initiative, policy actions should focus on reducing labour and product market rigidities to ease firms' entry and exit, expand the manufacturing base, and gainfully employ the abundant pool of labour,'' IMF said.

''Policy actions should also consolidate the disinflation under way since the collapse in commodity prices through agricultural sector reforms and infrastructure enhancements to ease supply bottlenecks; boost financial stability through full recognition of non-performing loans and raising public sector banks' capital buffers; and secure the public finances through continued reduction of poorly targeted subsidies and structural tax reforms, including implementation of the recently approved nationwide goods and services tax,'' it added.

In India, IMF sees an acceleration of activity, resulting from the implementation of important structural reforms, after it slowed down in FY17 due to the currency exchange programme. "Medium-term growth prospects are favourable, with growth forecast to rise to about 8 per cent over the medium term due to the implementation of key reforms, loosening of supply-side bottlenecks, and appropriate fiscal and monetary policies," the report said.

IMF has called for policy action in India to reduce labour and product market rigidities, easier setting up of business and exit, bigger manufacturing base, and gainful employment for the abundant pool of labour.

It's possible that the successful rollout of GST, improved ease of doing business and a more focused development delivery mechanism would boost the growth momentum, it said.

"The way ahead is to shore up innovation and efficiency gains across the board, so that stakeholders can innovate and adapt quickly to changing environments. The world's most innovative economies put policy emphasis on sustained productivity improvements across industries and sectors, which lead to government effectiveness, business sophistication and give rise to creative goods and services, " it concluded.