IMF says demonetisation a big dampener, cuts India's growth to 6.6% from 7.6% 01-18

The IMF today cut India's growth rate for the current fiscal year to 6.6 per cent from its previous estimate of 7.6 per cent due to the "temporary negative consumption shock" of demonetisation, days after the World Bank also decelerated India's growth estimates.

"In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update released today.

The IMF said that after a lacklustre outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies.

The global growth for 2016 is now estimated at 3.1 per cent, in line with the October 2016 forecast.
Economic activity in both advanced economies and emerging market and developing economies (EMDEs) is forecast to accelerate in 2017-18, with global growth projected to be 3.4 per cent and 3.6 per cent, respectively, again unchanged from the October forecasts, it said.

As per new IMF projections, India's growth in 2016 is now estimated to be 6.6 per cent as against 7.6 per cent earlier forecast.

In 2017, IMF has projected a growth rate of 7.2 per cent as against its previous forecast of 7.6 per cent.

The Indian economy is likely to revive to go back to its previously estimated growth rate of 7.7 per cent in 2018, according to the WEO update.

The cut in India's growth rates comes days after the World Bank decelerated India's GDP growth for 2016-17 fiscal to 7 per cent from its previous estimate of 7.6 per cent citing the impact of demonetisation. But forecast issued on January 11 said that India would regain momentum in the following years with a growth of 7.6 per cent and 7.8 per cent due to a reform initiatives.
Despite IMF's downward revision of India's growth rate and a slight upward revision of China's growth projections, India continues to be the fastest growing countries among emerging economies.
But in 2016, China with 6.7 per cent has edged past India (6.6) with 0.1 percentage point.
The growth forecast for 2017 was revised up for China (to 6.5 per cent, 0.3 percentage point above the October forecast) on expectations of continued policy support, the IMF said. India's growth rate in 2017 as per the latest IMG projections is 7.2 per cent.

In 2018, China's growth rate is projected to be 6 per cent against India's 7.7 per cent.
IMF said, in China, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment.

These risks can be exacerbated by capital outflow pressures especially in a more unsettled external environment, the IMF said.

IMF said global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the US or China.

Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China, it said.

Maurice Obstfeld, Economic Counsellor and IMF Research Department Director, at a news conference here, said among emerging economies, China remains a major driver of world economic developments.

"Our China growth upgrade for 2017 is a key factor underpinning the coming year's expected faster global recovery. This change reflects an expectation of continuing policy support; but a sharp or disruptive slowdown in the future remains a risk given continuing rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms," he said.

In light of the US economy's momentum coming into 2017 and the likely shift in policy mix, IMF has moderately raised its two-year projections for US growth.

"At this early stage, however, the specifics of future fiscal legislation remain unclear, as do the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar," Obstfeld said.



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IMF punches holes in India's growth revival story 02-21

IMF punches holes in India's growth revival story

Says RBI may have to continue raising rates; prescribes floating sovereign bonds, going for NRI forex swaps again.

But the International Monetary Fund (IMF) doesn't seem to agree. It questions all these assertions in its staff report, prepared after discussions with Indian authorities and released on Thursday. It attributes much of India's economic slowdown to domestic factors, such as "heightened policy uncertainty". It projects a growth rate of 4.6 per cent this year (against the government's estimate of 4.9 per cent) and a CAD level of $61 billion, or 3.3 per cent of GDP.

However, in a teleconference call later in the evening, IMF's mission chief in India, Paul Cashin, clarified the CAD might come to 2.5 per cent of GDP.

IMF has said in its staff report, under Article IV consultations: "About two-thirds of the slowdown in India can be explained by domestic factors." Besides policy uncertainty, domestic causes of the slowdown include supply bottlenecks, delayed project approvals and implementation.

The report was released three days after the Interim Budget was tabled in Parliament, where Finance Minister P Chidambaram said: "I reject the argument of a policy paralysis."

Even on inflation, which has been persistently high for some time, IMF appears to be singing a different tune. It says India's growth slowdown is unusual among emerging markets both in terms of severity and because it coincides with elevated inflation.

It has said the rate of retail inflation is likely to remain near double digits well into next year. It expects the inflation rate to be 7.4 per cent by March 2014 - above the Reserve Bank of India's (RBI's) comfort zone - and falling only slowly to 6.3 per cent by March 2015.

It has also said that RBI might have to continue raising policy rates in the coming months. "The ingrained nature of inflation and inflation expectations mean that reducing inflation - even over a protracted horizon - might require significant increases in policy rates," the staff report said, though it admitted that any such move would weigh on economic growth. In his interim Budget speech, delivered on Monday, Chidambaram had said: "RBI must strike a balance between price stability and growth while formulating monetary policy."

The IMF report also carries authorities' viewpoints. It says Indian authorities agree that inflation is too high and that monetary policy will need to remain vigilant over the near term.

"At the same time, they (authorities) noted that supply-driven food inflation was a key driver of the headline number... With good monsoon this year, they believed food inflation should fall and that, in any case, monetary policy had a limited role in tackling food inflation."

The Indian authorities consider there is a significant risk of over-tightening, particularly in the light of the need to create jobs to absorb the country's growing labour force, the Fund says.

IMF has projected twin deficits higher than the authorities' projections. It pegs fiscal deficit at 5.3 per cent of GDP in 2013-14, against the government's hope of 4.6 per cent. As a proportion of GDP, the IMF staff expects India's CAD to be 3.3 per cent, against less than three per cent pegged by the finance minister in his Budget speech.

IMF does not take into account disinvestment receipts in its estimation of fiscal deficit, so the deficit will be magnifies to that extent.

Agreeing that the opening of sectors to foreign direct investment and portfolio flows in 2013 will help finance CAD, the multi-lateral agency warns that a further relaxation of external commercial borrowing rules should be undertaken only incrementally and cautiously, alongside a deeper domestic financial markets.

It has prescribed that issuing a maiden international sovereign bond and seeking entry into global bond indices should also be explored. Similarly, its recipe includes again going for foreign exchange swaps for non-resident Indian deposits - after RBI undertook such a step in September 2013.

IMF also recommends taking oil marketing companies out of the spot market and offering them a short-term bilateral foreign exchange swap window at market prices.

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