IMF blames policy muddle for India’s sluggish economic growth

Economic growth slowed to a seven-year low to 5 per cent in April to June quarter from 8 per cent a year ago, as per the government data.

The growth is expected to rise to 7.2 per cent points in FY21, down by the projected growth rate of 7.5 in the earlier report.

The slowdown was largely due to a sharp dip in the manufacturing sector and agriculture sector output, according to a statement released by the ministry of statistics and programme implementation.

"Again, we will have a fresh set of numbers coming up, but the recent economic growth in India is much weaker than expected, mainly due to corporate and environmental regulatory uncertainties and lingering weakness in some non-bank financial companies and risks to the outlook are tilted to the downside, as we like to say," IMF spokesman Gerry Rice told reporters at a news conference.

The previous low was recorded at 4.9 per cent in April to June 2012-13. Consumer demand and private investment have weakened amid global trade frictions and dampening business sentiment.

IMF has lowered growth projections across emerging market and developing economies, by 0.3 percentage points in 2019 to 4.1 per cent and by 0.1 percentage points for 2020 to 4.7 per cent.

The downward revisions for 2019 are almost across the board for the major economies, though for varied reasons. In China, the slight revision downwards reflects, in part, the higher tariffs imposed by the United States in May, while the more significant revisions in India and Brazil reflect weaker-than-expected domestic demand.

In its July update of the World Economic Outlook IMF has revised downward its projection for global growth to 3.2 percent in 2019 and 3.5 per cent in 2020.  While this is a modest revision of 0.1 percentage points for both years relative to the projections in April, it comes on top of previous significant downward revisions. 

The revision for 2019 reflected negative surprises for growth in emerging market and developing economies that offset positive surprises in some advanced economies, IMF stated.

Growth is projected to improve between 2019 and 2020. However, close to 70 per cent of the increase relies on an improvement in the growth performance in stressed emerging market and developing economies and is therefore subject to high uncertainty, the report pointed out.

Global growth is sluggish and precarious, but it does not have to be this way because some of this is 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.

Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted.

Global trade growth, which moves closely with investment, has slowed significantly to 0.5 percent (year-on-year) in the first quarter of 2019, which is its slowest pace since 2012. On the other hand, the services sector is holding up and consumer sentiment is strong, as unemployment rates touch record lows and wage incomes rise in several countries.

Among advanced economies, the United States, Japan, the United Kingdom, and the euro area grew faster than expected in the first quarter of 2019. However, some of the factors behind this, such as stronger inventory build-ups, are transitory and the growth momentum going forward is expected to be weaker, especially for countries reliant on external demand, the report stated.

Owing to first quarter upward revisions, especially for the United States, we are raising our projection for advanced economies slightly, by 0.1 percentage points, to 1.9 per cent for 2019. Going forward, growth is projected to slow to 1.7 per cent, as the effects of fiscal stimulus taper off in the United States and weak productivity growth and aging demographics dampen long-run prospects for advanced economies.

In emerging market and developing economies, growth is being revised down by 0.3 percentage points in 2019 to 4.1 per cent and by 0.1 percentage points for 2020 to 4.7 per cent. The downward revisions for 2019 are almost across the board for the major economies, though for varied reasons. In China, the slight revision downwards reflects, in part, the higher tariffs imposed by the United States in May, while the more significant revisions in India and Brazil reflect weaker-than-expected domestic demand.

For commodity exporters, supply disruptions, such as in Russia and Chile, and sanctions on Iran, have led to downward revisions despite a near-term strengthening in oil prices. The projected recovery in growth between 2019 and 2020 in emerging market and developing economies relies on improved growth outcomes in stressed economies such as Argentina, Turkey, Iran, and Venezuela, and therefore is subject to significant uncertainty.

Financial conditions in the United States and the euro area have further eased, as the US Federal Reserve and the European Central Bank adopted a more accommodative monetary policy stance. Emerging market and developing economies have benefited from monetary easing in major economies but have also faced volatile risk sentiment tied to trade tensions. On net, financial conditions are about the same for this group as in April. Low-income developing countries that previously received mainly stable foreign direct investment flows now receive significant volatile portfolio flows, as the search for yield in a low interest rate environment reaches frontier markets.

A major downside risk to the outlook remains an escalation of trade and technology tensions that can significantly disrupt global supply chains. The combined effect of tariffs imposed last year and potential tariffs envisaged in May between the United States and China could reduce the level of global GDP in 2020 by 0.5 per cent. Further, a surprise and durable worsening of financial sentiment can expose financial vulnerabilities built up over years of low interest rates, while disinflationary pressures can lead to difficulties in debt servicing for borrowers. Other significant risks include a surprise slowdown in China, the lack of a recovery in the euro area, a no-deal Brexit, and escalation of geopolitical tensions.

With global growth subdued and downside risks dominating the outlook, the global economy remains at a delicate juncture. It is therefore essential that tariffs are not used to target bilateral trade balances or as a general-purpose tool to tackle international disagreements. To help resolve conflicts, the rules-based multilateral trading system should be strengthened and modernized to encompass areas such as digital services, subsidies, and technology transfer.

Monetary policy should remain accommodative especially where inflation is softening below target. But it needs to be accompanied by sound trade policies that would lift the outlook and reduce downside risks. With persistently low interest rates, macroprudential tools should be deployed to ensure that financial risks do not build up.

Fiscal policy should balance growth, equity, and sustainability concerns, including protecting society’s most vulnerable. Countries with fiscal space should invest in physical and social infrastructure to raise potential growth. In the event of a severe downturn, a synchronised move toward more accommodative fiscal policies should complement monetary easing, subject to country specific circumstances.

Lastly, the need for greater global cooperation is ever urgent. In addition to resolving trade and technology tensions, countries need to work together to address major issues such as climate change, international taxation, corruption, cybersecurity, and the opportunities and challenges of newly emerging digital payment technologies.