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IMF lowers India growth to 4.8%, calls it a drag on world economy too

For the current calendar year 2020, India saw a sharp 1.2 percentage point cut in its growth forecast to 5.8 per cent, the biggest downward revision for any emerging market, which pulled down global growth forecast.

By: ENS Economic Bureau | New Delhi | Updated: January 22, 2020 3:08:03 pm
IMF lowers India growth to 4.8%, calls it a drag on world economy too The Fund projected that monetary and fiscal stimulus is expected to lift India’s growth rate to 6.5 per cent in 2021, which again is 90 basis points lower than forecast in October. (Representational Image)

The International Monetary Fund (IMF) Monday marginally lowered its growth estimate for the world economy to 2.9 per cent for 2019, citing negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years.

For 2019, the fund revised downward its forecast for India to 4.8 per cent from its October projection of 6.1 per cent. For the current calendar year 2020, India saw a sharp 1.2 percentage point cut in its growth forecast to 5.8 per cent, the biggest downward revision for any emerging market, which pulled down global growth forecast.

According to an update to the IMF’s World Economic Outlook (WEO) released ahead of the World Economic Forum in Davos, global growth is projected to rise from an estimated 2.9 percent in 2019 to 3.3 percent in 2020 and 3.4 percent for 2021 – a downward revision of 10 basis points for 2019 and 2020 and 20 basis points for 2021 compared to the forecast in the October WEO.

“The growth markdown largely reflects a downward revision to India’s projection, where domestic demand has slowed more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth,” the IMF said.

Explained

2020 to be better, but risks remain

The global economy does not offer much hope in 2020, with IMF cutting growth forecast for both China and India. Global growth is expected to be 3.3% in 2020, up from 2.9% in 2019, but uncertainties remain: a return of US-China trade war, new US-EU trade tensions, and poor performance of emerging markets.

The Fund projected that monetary and fiscal stimulus is expected to lift India’s growth rate to 6.5 per cent in 2021, which again is 90 basis points lower than forecast in October. India’s GDP growth rate at 4.5 per cent for July-September quarter of 2019-20, has hit a 26-quarter low, dragged down by a contraction in manufacturing, weak investment, and lower consumption demand, as per data from the National Statistical Office (NSO).

The IMF, however, said that market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out. “There are preliminary signs that the decline in manufacturing and trade may be bottoming out. This is partly from an improvement in the auto sector as disruptions from new emission standards start to fade. A US-China Phase I deal, if durable, is expected to reduce the cumulative negative impact of trade tensions on global GDP by end 2020-from 0.8 percent to 0.5 percent,” IMF Chief Economist Gita Gopinath said in a blog.

Gopinath, however, said the pickup in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for stressed economies like Argentina, Iran, and Turkey and for under-performing emerging and developing economies such as Brazil, India, and Mexico.

There is also a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit, leading to some retreat from the risk-off environment that had set in at the time of the October WEO. The US Federal Reserve has cut rates three times last year and expects to keep rates low for the foreseeable future – a move that will keep supporting global growth.

Growth in China is projected to fall from an estimated 6.1 per cent in 2019 to 6 per cent in 2020 and 5.8 per cent in 2021. The envisaged partial rollback of past tariffs and pause in additional tariff hikes as part of a Phase I trade deal with the US is likely to alleviate near-term cyclical weakness, resulting in a 0.2 percentage point upgrade to the country’s 2020 growth forecast relative to the October WEO, the IMF said.

However, in the United States, the IMF foresees growth slowing from 2.3 per cent in 2019 to 2 per cent this year and 1.7 per cent in 2021, partly because the boost that the economy received from President Donald Trump’s 2017 tax cuts has been fading. Japan’s economic growth, is expected to decelerate from 1 per cent last year to 0.7 per cent this year to 0.5 per cent next year. Collective growth in the 19 countries that use the euro currency is expected to gradually pick up fro 1.2 per cent in 2019 to 1.3 per cent in 2020 and 1.4 per cent in 2021.

“Overall, the risks to the global economy remain on the downside, despite positive news on trade and diminishing concerns of a no-deal Brexit. New trade tensions could emerge between the United States and the European Union, and US-China trade tensions could return. Such events alongside rising geopolitical risks and intensifying social unrest could reverse easy financing conditions, expose financial vulnerabilities, and severely disrupt growth,” Gopinath said. IMF said policy space available to global policy-makers to respond to downside risks is somewhat limited.

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