India drag on global economy, says IMF

inflation, economy
While another repo rate hike seems a certainty, the RBI may also take steps to address structural issues that fuel inflation.

The International Monetary Fund has confirmed the worst fears of India watchers by cutting India’s growth forecast for the current financial year by 130 basis points to 4.8%.  IMF’s World Economic Outlook update blamed Indian slowdown for the downward revision of world growth projection to 1.9%. IMF chief economist Gita Gopinath said India growth forecast was cut because of a crisis in non-bank financial sector and slow growth in rural income.

The National Statistical Office in its advanced estimates had predicted that the Indian economy will grow 5% in 2019-20, down from 6.8% in the last fiscal. The Reserve Bank of India had also forecast a 5% expansion of the economy this year. The economy grew by 4.5% in the second quarter of the fiscal ended September after posting 5% growth in the first quarter. The IMF chief economist had predicted a sharp downward revision of the Fund’s India growth estimates for the year.

Several economists say the headline growth figures are grossly understated. Recent investment, industrial output and employment numbers point to more dismal economic scenario. It is widely expected that the Union budget to be presented by finance minister Nirmala Sitharaman may come up with stimulus measure to revive growth, but the fiscal situation may not allow the FM to do so.

The finance minister had reduced the fiscal deficit target for the current financial year to 3.3% of the GDP in her July budget from 3.4% targeted by the interim Budget presented in February. However, she cut corporate taxes in September, a step that is expected to result in revenue losses to the tune of Rs 1,45,000 crore.

Economists like former chief economic adviser Arvind Subramanian have voiced their opinion against an expansionary Budget this year. Subramanian says while advanced countries continue to come up with fiscal stimulus packages since the meltdown last decade, the Indian government should resist the temptation to do so. India’s consolidated fiscal deficit last year was close to 9% in 2018-19, he says, predicting a higher figure in the current fiscal. He says a double-digit fiscal deficit will raise sustainability concerns in a slowdown scenario.