In its latest World Economic Outlook, the International Monetary Fund (IMF) has presented a sobering assessment of the state of the Indian economy. The Fund has not only lowered its expectations of the country’s economic prospects for this year, but has also drastically cut its forecast for growth over the next two years. The IMF now expects India to grow at 4.8 per cent this fiscal year, marginally lower than the 5 per cent projected by the National Statistical Office. And while the Fund expects growth to pick up to 5.8 per cent next year, it is still 1.2 percentage points lower than its assessment in its October outlook. Some in India have argued that the country’s current economic slowdown is largely due to sluggish global growth and trade. But, the IMF notes, rightly so, that the downward revision in India’s growth prospects is more due to domestic issues — domestic demand has slowed down more sharply than expected amid stress in the non-banking financial sector, a decline in credit growth and poor growth in rural incomes. This downward revision in India’s growth prospects has pulled down global growth prospects more than the other way around.
To be sure, global trade growth has been subdued. As per the IMF, growth of world trade volume (goods and services) slowed to a mere 1 per cent in 2019, down from 3.7 per cent the year before. Yet, even as India’s exports have remained almost stagnant over the last five years or so, Bangladesh’s garment exports have surged during this period, as have those of other south-east Asian countries. And while India’s economy has slowed down sharply, neighbouring Bangladesh is likely to have grown at around 8 per cent. This is not to deny that global risks to growth exist. Geopolitical tensions in the Middle East could lead to higher crude oil prices resulting in macro-economic instability. Yet, at this moment, India’s challenges are largely domestic.
Almost six years ago, the BJP under Narendra Modi came to power on the promise of returning the country to a high-growth trajectory. That promise has bumped up against enormous challenges. Going by the IMF’s projections, at this rate, growth is likely to average only around 5.7 per cent in the first three years of this government’s tenure. The upcoming Union budget is an opportune moment for the government to review and course correct. With constrained space for a meaningful fiscal stimulus, and with the limits of monetary easing being tested, the government should clearly articulate how it plans to support the economy during this difficult period. At the current juncture, the urgency of focusing on deeper reforms to return to a high-growth trajectory cannot be overstated.
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