IMF cuts India growth forecast to 6.7% in 2017, sees recovery in medium term

After Reserve Bank of India's (RBI) liberal scissoring of current fiscal's economic growth outlook last week, International Monetary Fund (IMF) also on Tuesday joined a long list of agencies that have snipped their forecast for India's gross domestic product (GDP) growth in the current year.

In its World Economic Outlook (WEO) report, released on Tuesday, the global multilateral lending organisation trimmed its projection for economic growth in 2017 to 6.7 per cent from the earlier 7.1 per cent citing government's demonetization of high value currency and disruption of economic activities due to introduction of Goods and Services Tax (GST) as reasons for its slower growth outlook.

According to IMF's outlook, China is likely to grow 10 basis points (bps) ahead of India at 6.8 per cent this year but India would more than catch-up on growth with its Asian neighbour next year.

The Fund projects India's economic growth to recover in 2018 to 7.4 per cent, while China' growth at 6.5 per cent.

"In India, growth momentum slowed, reflecting the lingering impact of the authorities' currency exchange initiative as well as uncertainty related to the mid-year introduction of GST.

Strong government spending and data revisions in India led to an upward revision of 2016 growth to 7.1 per cent (6.8 per cent in April), with upward revisions of about 0.2 percentage points, on average, for 2014 and 2015," it said in its latest WEO report.

The IMF's slash in India's GDP growth forecast has come after similar downward revision by other agencies such as Fitch Ratings, which has brought it down to 6.9 per cent from 7.4 per cent; India Ratings and Research that has cut it to 6.7 per cent from 7.4 per cent and Asian Development Bank (ADB), which has lowered it to 7 per cent from 7.4 per cent.

On Monday, World Bank's South Asia Economic Focus (Fall 2017) report also marginally snipped India's GDP growth forecast to 7 per cent for the current fiscal from its earlier prediction of 7.2 per cent. Like IMF, it also expects a turnaround in India's economy to 7.4 per cent by 2019-20. Similarly, Organisation for Economic Cooperation and Development's (OECD) has also revised downward its estimates for current fiscal's economic growth to 6.7 per cent from 7 per cent.

DK Srivastava, chief policy advisor, EY India, said IMF and other agencies' GDP growth projections were in line with RBI's outlook but a turnaround, as predicted by them, would depend a lot on the government's "accelerated GST reforms and fiscal stimulation".

"Their projection is very much in line with RBI's projection but much will depend on the reforms that the government undertakes to change this picture. If they (government) undertake further accelerated GST reforms and fiscal stimulation then the turnover would be quicker," he said.

He said, by GST reforms he meant its accelerated simplification and further easing of compliance burden.

"Public spending can be undertaken as far as it can be made without compromising with the fiscal deficit target. They (government) should try to adhere to the (fiscal deficit) target," said EY's economist.

The central bank wrote in its review report of monetary policy that next fiscal growth would jump to 7.4 per cent, "assuming a normal monsoon, fiscal consolidation in line with the announced trajectory, and no major exogenous/policy shocks".

India's GDP growth has been tumbling since the middle of last year after the government undertook demonetization of Rs 500 and Rs 1,000 notes late last year and launched the new unified indirect tax – GST – from July this year. Economists attribute these structural reforms as reasons for slowdown in economic growth but expect a recovery in the medium term.

The lowering of India's GDP growth by IMF has come at a time when it has raised the global growth estimate marginally to 3.6 per cent.