IMF revises India's growth to 7.6% for FY17 and FY18

The International Monetary Fund (IMF) on Tuesday raised projections for India’s economic growth by 0.2 percentage points to 7.6 per cent for 2016-17 and 2017-18. The projections came in at a time when the Fund said global economic growth will be subdued this year, following a slowdown in the US and Britain’s vote to exit the European Union. It, however, retained global economic growth at

3.1 per cent for 2016 and 3.4 per cent for 2017. In its World Economic Outlook, IMF also kept gross domestic product (GDP) expansion for China unchanged at 6.6 per cent in 2016, which would decelerate to 6.2 per cent in 2017. That way, India would keep its position of the fastest-growing large economy that it snatched from China in 2015-16.

“India’s GDP will continue to expand at the fastest pace among major economies, with growth forecast at 7.6 per cent in 2016–17,” it said in its outlook released three days ahead of its annual meetings with the World Bank in Washington. The Fund cut growth rate of the US by 0.6 percentage points for 2016. It, however, cautioned India that weak corporate and public-sector banks’ balance sheets would restrict private investment in the near-term where the Reserve Bank of India’s (RBI) continued role to increase lenders’ capacity to give loans would be critical. It highlighted the importance of the goods and services tax, which is targeted to be introduced from April 1, 2017 and elimination of poorly targeted subsidies. IMF had released its previous estimates through an update in July. However, if looked from the April outlook, the global growth was cut by 0.1 percentage point each for 2016 and 2017, while it was raised for India by 0.1 percentage point for 2016-17 and 2017-18. IMF’s projection is more or less in line with the finance ministry’s optimism that the growth would be towards the upper band of its projections — 7-7.75 per cent — in the current financial year.

However, it is higher than what the Asian Development Bank and Fitch predicted. India’s economy expanded 7.6 per cent in 2015-16. So, IMF’s projections also mean that the GDP growth would remain stagnant for three consecutive years. The growth rate was five-quarter low at 7.1 per cent in the first three months of the current financial year.

IMF revises India's growth to 7.6% for FY17 and FY18IMF also projected India’s economic growth rate to touch 8.1 per cent in 2021-22. Fitch had said on Monday that India’s GDP growth could touch eight per cent only in 2018-19, as it expects the benefits of reforms and impact of monetary easing to kick in with a lag. IMF did not give projections for 2018-19 and 2019-20.

It said India’s economy continued to recover strongly, benefiting from a large improvement in the terms of trade triggered by lower commodity prices, effective policy actions and stronger external buffers which have helped boost investment. Inflation has declined more than expected, it said.

Consumer price index-based inflation fell to a five-month low of 5.05 per cent in August from 6.07 per cent in July. IMF projected inflation to average 5.5 per cent in the current financial year and decelerate to 5.2 per cent next year.

Nevertheless, underlying inflationary pressures arising from bottlenecks in the food storage and distribution sector point to the need for structural reforms to ensure that consumer price inflation remains within the target band over the medium term, the Fund said.  Additional labour market reforms to reduce rigidities are essential for maximising the employment potential of the demographic dividend and making growth more inclusive, it said.

In the near term, it said private investment will likely be constrained by weakened corporate and public bank balance sheets. "Continued efforts by the Reserve Bank of India to strengthen bank balance sheets through full recognition of losses and increasing bank capital buffers remain critical for improving the quality of domestic financial intermediation," it said.

The multi-lateral agency said important policy actions toward the implementation of GST have been taken, which will be positive for investment and growth. Constitution amendment legislation to enable the Centre and states implement GST has been enacted. The GST Council, comprising representatives of the Centre and states, have been formed which has already solved prickly issue of a threshold over which GST would apply and cleared rules for registration and refunds under the new tax regime.

Another thorny issue of rates, compensation and dual administrative control over service tax would come up at the Council's scheduled meeting for later this month.

IMF said this tax reform and the elimination of poorly targeted subsidies are needed to widen the revenue base and expand the fiscal envelope to support investment in infrastructure, education, and health care.

More broadly, while several positive measures have been undertaken over the past two years,  IMF pointed out, suggesting that additional measures to enhance efficiency in the mining sector and increase electricity generation are required to boost productive capacity.