Opinion Express View on IMF lowering India’s growth forecast: Policy framework must preserve macroeconomic stability

In its latest world economic outlook, the International Monetary Fund has lowered its expectations of global economic growth as signs of a possible soft landing abate amidst continuing elevated inflation and the recent turmoil in the financial sector. The IMF now expects the world economy to slow down to 2.8 per cent in 2023, down from 3.4 per cent in 2022. The slowdown is expected to centre around the advanced economies. The Fund now projects them to grow at 1.3 per cent this year, down from 2.7 per cent the year before, with the economies of the UK and the Euro region likely to fare the worst. On the other hand, the prospects for developing countries are better with these economies expected to grow at 3.9 per cent in the ongoing year, only marginally lower than last year.

The IMF has also revised downwards its growth forecast for the Indian economy to 5.9 per cent in 2023-24 from its earlier assessment of 6.1 per cent. The revision is on account of a slowdown in consumption and incorporation of recent data. This implies that the “revenge consumption” boom, the impetus to growth from pent up demand, is fading. The IMF now expects economic activity to be driven by investments and exports, primarily those of services. However, there is reason for caution on both. On investments, while both central and state governments have budgeted for an aggressive increase in capital spending, lower than expected capex by states last year raises questions over their ability to meet the ambitious targets this year. This implies that the overall public sector impulse to investment activity may perhaps be lower than expected, even as private investments remain subdued. On exports, while services exports have been robust — during April-February 2022-23, they grew by 30 per cent — goods exports rose by a mere 7.5 per cent. Strip away oil exports, and merchandise exports during this period were at the same level as the year before. And with global trade projected to slow down from 5.1 per cent in 2022 to 2.4 per cent in 2023, the rising tide of world growth will be unavailable. India’s exports are likely to come under severe pressure, limiting the impetus to overall activity.

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There is, however, variation across agencies in their assessments of India’s growth. For instance, the Asian Development Bank has pegged growth at 6.4 per cent, the World Bank at 6.3 per cent, Crisil at 6 per cent, and Nomura even lower. At the other end of the spectrum is the RBI’s more optimistic assessment — it has recently raised its forecast to 6.5 per cent. While there is considerable uncertainty in the global and domestic economy which makes it difficult to arrive at an accurate assessment of the state of the economy, at this critical juncture, with an uncertain growth outlook and with inflation staying above the central bank’s target, the policy framework must be guided by the objective of preserving macroeconomic stability.