InvestorQ : Has the IMF downsized India’s GDP growth and why has it done so?
swati Bakhda made post

Has the IMF downsized India’s GDP growth and why has it done so?

Sam Eswaran answered.
1 month ago

As pe the latest World economic Outlook (WEO) published for October 2022 by the International Monetary Fund (IMF) it has highlighted key challenges to growth. It has not only cut the India growth rate but also warned that it could get worse in the coming quarters. Here is what the IMF report says about India and the world economy.

a) The WEO report has underlined factors like Ukraine war, steeply high inflation, risks of recession, large scale consumer pessimism and even the lag effect of pandemic as key risks.

b) The WEO report also specifically points to the risks from the consistent lockdowns in China due to their persistent zero COVID policies. This is impact the global demand for commodities in a big way.

c) According to the report, India’s growth for FY23 is likely to falter to 6.8% from a level of 8.7% in the fiscal year FY22. In July 2022, IMF had cut India’s projected GDP growth by 80 basis points from 8.2% to 7.4%. Now the second downgrade is of 60 basis points to 6.8%. So the total growth cut by the IMF for India for FY23 is 140 bps in last 2 months.

d) IMF expects the inflation levels in India to gradually taper to 6.9% by March 2023 and subsequently fall further to 5.1% by March 2024. That would be the result of the sustained hawkish policies of the RBI. While India may not have a hard landing, it would still be vulnerable to the problem of reduced growth.

e) According to the IMF, the biggest reasons for the slowdown in growth is likely to be the weak export demand and reduced spending globally, which is likely to hit areas like tech spending in the US, Europe and UK.

f) While IMF has not yet downgraded the global growth rate, it expects pressure on the growth. It does expect developed countries like the US, UK and the EU to dip into recession by next year as they try to curb inflation. The US is expected to grow at 1.6% in 2022 and 1.0% in 2023. China is likely to see a distinct slowdown, growing at 3.2% in 2022 and then 4.4% in 2023.

g) In the Indian context, the IMF has highlighted the risks of monetary policy and fiscal policy working at cross purposes. Here is the reason. On the one hand, India was trying to boost growth fiscally while on the other hand it was trying to control inflation monetarily.

h) In terms of global macro risks, IMF thinks it could come from the energy crisis in the EU and UK. However, higher crude prices due to supply constraints could hit India hard as it depends on imports to meet 85% of its energy needs.