IMF’s latest news may not be bad news for India if it plays its cards right

28 Jul 2022

Opinion: Poonam Gupta

As far as countercyclical policy support is concerned it is important to adhere to macroeconomic prudence and to recreate adequate policy buffers. There are certain policy actions India could pursue.

In the latest World Economic Outlook (WEO) released on Tuesday the International Monetary Fund (IMF) has lowered the projected growth rate for the world economy to 3.2% in 2022 and to 2.9% in 2023 from the 3.6% it had earlier projected for each year. Putting these numbers in perspective during the current as well as next year the world economy is expected to grow at a rate slower than the average decadal growth rate of 3.7% prior to the Covid pandemic or that of 4.2% prior to the Global Financial Crisis.

IMF has attributed the growth downgrades to exceptional tightening of monetary policy around the world in the wake of high and persistent inflation the impact of Covid-induced lockdowns in China and the impact of the prolonged Russia-Ukraine war.

A Deeper Dip

That is not all. It has cautioned that the growth out-turns may be even lower than the latest downgraded rates. The downside risks stem from the Russia-Ukraine war getting further prolonged inflation turning out to be sticky despite aggressive policy actions and the persistence of Covid that could continue to result in restrictions on mobility and economic activity. Conditional on these risks materialising global growth could decline further to about 2.6% and 2% in 2022 and 2023 respectively.

In line with the revisions for most other countries IMF has also downgraded the outlook for India’s growth rate from its earlier projection of 8.2% to 7.3% for the current year and to about 6% for next year.

  • IMF’s prognosis raises two questions.
  • Are these revised projections reasonable for India?
  • In what way can this outlook guide the policy framework for India?

The magnitude of the downgrade for the current year is the fourth largest for India less than only the downgrades for the US China and Germany at 1.4 1.1 and 0.9 percentage points respectively. The downgrades for these economies have been attributed to their unique circumstances including high and persistent inflation in the US necessitating aggressive monetary policy actions China’s ‘zero-Covid’ policy resulting in severe lockdowns and Germany bearing the brunt of the war in Ukraine and an unprecedented level of inflation.

India has been impacted primarily by the spillovers of global shocks rather than specific home-grown challenges. Its economy has been adversely affected by the high oil prices and tightening of the monetary policy in the US resulting in the reversal of capital flows. Its growth downgrade may be attributed as much to IMF’s objective of correcting the erstwhile unduly optimistic projected growth rate of 8.2% as to these spillovers.

The revised projected growth rate of 7.3% for India is closer to the official estimates and seems more realistic. If the global environment turns out to be as grim as projected by IMF the growth out-turn for India this year may be even slower at or a bit below 7%.

Beyond these headline numbers for projected economic growth rates for various countries the WEO Update also contains relevant projections for oil prices inflation and trade volumes:

  • Oil price would peak this year and decline by 12% in 2023.
  • Global inflation is projected to peak at about 8% this year while settling down to below 6% next year.
  • Inflation level in advanced economies is expected to climb down from 6.6% this year to 3.3% next.
  • The trade outlook is more sombre with an anticipated growth of only 4% this year falling further to 3% next.

Shout-Out to Green Shoots

From India’s perspective this outlook on balance seems positive. Being a net importer of oil India’s growth rate is directly shaved off by high oil prices in a technical accounting way as they lead to an increase in the import bill of oil. Any reduction in oil prices in the near future as predicted by IMF will lower India’s import bill and boost its growth rate.

Benign projections of oil prices and global inflation combined with projections of a normal monsoon indicate that domestic inflation will peak soon. This would result in a rather short cycle of monetary policy tightening likely to end during the fiscal year.

Apart from the WEO updates other predictions have highlighted similar trends. A recent Bloomberg survey indicated that US policy rates are expected to peak by early- to mid-2023 and to thereafter start declining. These developments would help restore normalcy in the international financial markets and bring back investment flows to emerging markets including to India.

The gloomy trade outlook will however have a detrimental impact on growth in India. A ray of hope is that India has shown encouraging though still nascent trade buoyancy during the past year. This needs to be consolidated on priority. Towards this end it would be prudent to focus on:

  • Firming up new free trade agreements (FTAs). Ensuring a competitive exchange rate.
  • Leveraging the policy attention to logistics in the trade sector.

As far as countercyclical policy support is concerned it is important to adhere to macroeconomic prudence and to recreate adequate policy buffers. Possible policy actions include:

  • Normalising monetary policy.
  • Allowing the exchange rate to act as a natural stabiliser.
  • Out-of-the-box thinking to make the country’s fiscal policy sustainable again. This is particularly critical as India’s fiscal policy has ostensibly run its course and is calling out for an urgent and much overdue revamp.

Poonam Gupta is Director General at NCAER. The views expressed are personal.

Published in: The Economic Times, 28 Jul 2022