IMF cuts down India’s annual growth forecast by 0.4 per cent, keeps it at 7.2 per cent

The IMF on Tuesday trimmed India’s annual growth forecast by 0.4 percentage points to 7.2 per cent for 2017, citing the impact of demonetization.

“In India, the growth forecast for 2017 has been trimmed by 0.4 percentage point to 7.2 per cent, primarily because of the temporary negative consumption shock induced by cash shortages and payment disruptions from the recent currency exchange initiative,” the International Monetary Fund (IMF) said in its latest annual World Economic Outlook (WEO).

The World Economic Outlook was released here before the start of the annual Spring Meeting of the International Monetary Fund and World Bank.

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“Medium-term growth prospects are favourable, with growth forecast to rise to about eight 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 IMF report said.

The Indian government in February had pegged GDP growth at a higher-than-expected 7.1 per cent for the current fiscal despite the note ban.

However, analysts had raised concerns over the figure, saying it had not taken into account the full impact of demonetisation.

According to the IMF report, 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 firm entry and exit, expand the manufacturing base, and gainfully employ the abundant pool of labour,” it said.

Policy actions should also consolidate the disinflation underway since the collapse in commodity prices through agricultural sector reforms and infrastructure enhancements to ease supply bottlenecks, the report said.

Policy actions should also 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 said.

According to the report, growth in China is projected at 6.6 per cent in 2017, slowing to 6.2 per cent in 2018.

The upward revision to near-term growth—the 2017 forecast—is 0.4 percentage point higher than in the October 2016 WEO and the 2018 forecast is 0.2 percentage point higher.

It reflects the stronger-than-expected momentum in 2016 and the anticipation of continued policy support in the form of strong credit growth and reliance on public investment to achieve growth targets, the report said.

“The medium-term outlook, however, continues to be clouded by increasing resource mis-allocation and growing,” said the report, according to which the global economic activity is picking up with a long awaited cyclical recovery in investment, manufacturing, and trade.

World growth is expected to rise from 3.1 per cent in 2016 to 3.5 per cent in 2017 and 3.6 per cent in 2018, slightly above the October, 2016, WEO forecast.

Stronger activity and expectations of more robust global demand, coupled with agreed restrictions on oil supply, have helped commodity prices recover from their troughs in early 2016, it said.

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The IMF said a faster-than-expected pace of interest rate hikes in the US could tighten financial conditions elsewhere, with potential further US dollar appreciation straining emerging market economies with exchange rate pegs to the dollar or with material balance sheet mismatches.

“More generally, a reversal in market sentiment and confidence could tighten financial conditions and exacerbate existing vulnerabilities in a number of emerging market economies, including China—which faces the daunting challenge of reducing its reliance on credit growth,” it said.

According to the report, economic activity gained some momentum in the second half of 2016, especially in advanced economies.

Growth picked up in the United States as firms grew more confident about future demand, and inventories started contributing positively to growth after five quarters of drag, it said.

Growth also remained solid in the United Kingdom, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union, the report said.

Activity surprised on the upside in Japan thanks to strong net exports, as well as in euro area countries, such as Germany and Spain, as a result of strong domestic demand, the report said.

Economic performance across emerging market and developing economies has remained mixed, it said.

“Whereas China’s growth remained strong, reflecting continued policy support, activity has slowed in India because of the impact of the currency exchange initiative, as well as in Brazil, which has been mired in a deep recession.

“Activity remained weak in fuel and non-fuel commodity exporters more generally, while geopolitical factors held back growth in parts of the Middle East and Turkey,” the IMF said.