The International Monetary Fund has sounded warning bells for India over the ‘significant economic slowdown’. The situation is worse than earlier estimates. Latest IMF report indicates that the growth forecast for India is likely to be downgraded. The fresh forecast will be released in the first month of 2020. Listing out the reasons for the economic slowdown in India, The IMF said that, “weak income growth, especially rural, has been affecting private consumption.” The IMF also said that the GST regime may have played a role in the current situation of the Indian Economy. “Some implementation issues with important and appropriate structural reforms, such as the nation-wide goods and services tax (GST), may also have played a role,” the IMF said in a statement.
NBFC crisis was seen as the major factor for the economic slowdown. “The abrupt reduction in non-bank financial companies’ (NBFC) credit expansion and the associated broad-based tightening of credit conditions appears to be an important factor,” the IMF said.
Listing out the recommendations, the IMF said, “On monetary policy, given the sharper-than-expected slowdown and negative output gap (growth below potential), there is room to cut the policy rate further, especially if the economic slowdown continues. However, should inflationary pressures increase (stemming from the recent increase in food inflation and one-off prospective price increases in the auto and telecom sectors or resulting from fiscal pressures), the RBI will have limited room for further cuts.”
The statement came on a day when India-born IMF’s chief economist Gita Gopinath met Prime Minister Narendra Modi in New Delhi on Friday. Gopinath has been doubtful about India’s $5-trillion economy target. Instead of flatly rejecting the prospect, the 38-year-old economist had said that India will have to grow at 10.5 per cent in nominal terms as against 6 per cent in the last six years, and 8-9 per cent in real terms in order to achieve the target.
Recently, the Reserve Bank of India also cut the GDP growth forecast for the current fiscal to 5 per cent. The RBI revised retail inflation projection upwards to 5.1-4.7 per cent for second half of this fiscal.
The GDP growth slowed sharply to more than six-year low of 4.5 per cent in the July-September, hit by a slump in manufacturing output, which contracted by 1.0 per cent. The pace of GDP growth moderated from 5 per cent in April-June and 7 per cent in the July-September quarter of 2018. The fall in GDP growth rate was despite a slew of new fiscal policy measures, including a large reduction in the base corporate tax rate in a bid to boost private sector investment.