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Why IMF’s global economic outlook means both good and bad news for India

05 October, 2016

On Wednesday, International Monetary Fund (IMF) came out with its World Economic Outlook for October 2016. IMF has predicted subdued global growth at 3.1% during 2016 and 3.4% the following year.

The Washington-based organisation has further predicted that persistent stagnation in advanced economies could further fuel anti-trade sentiments and stifle growth. The report also makes some interesting observations about India and China. Here’s all that you need to know.

According to IMF, what factors are likely to subdue global economic growth?

Global economic growth will remain subdued owing to a slowdown in the US and the UK’s vote to leave the European Union, the IMF’s latest Global Economic Outlook has predicted. The report further says that eight years after the 2008 global economic crisis, the nature of recovery remains precarious. This could lead to stagflation among advanced economies and lead to protectionist calls for restrictions on trade and immigration, IMF says.

What is IMF’s growth outlook for advanced economies?

Alarmingly, IMF’s outlook for advanced economies is worse than that for the overall global economy. It says that in 2016, advanced economies will expand just 1.6% as compared to 2.1% last year. In fact, the IMF’s present forecast is lower than its July forecast of 1.8%. IMF cites two major factors for this 

markdown—a disappointing first half for the US economy due to weak investment and the UK’s vote to leave the European Union.  

What does IMF predict for economies like India and China?

There’s good news here. IMF says for the first time in six years, it expects growth in emerging markets to accelerate to 4.2% this year, and 4.6% in 2017. However, India is expected to outpace China. While China grew 6.9% last year, this year, the world’s second-largest economy will grow only by 6.6%. IMF says that in 2017, India’s eastern neighbour will grow even slower at 6.2%.

India’s gross domestic product is projected to expand 7.6% this year and next, the IMF said. This will be the fastest pace among the world’s major economies.

But are IMF’s predictions all good news for India?

Not really. IMF predicts that India will see 5.3% inflation by 2017, and the figure is likely to be 4.9% by 2021. Both these projections are above India’s targeted 5% inflation by 2017 and 4% by 2021. This clearly means that the IMF is skeptical of the efficacy of the policy measures adopted by the Reserve Bank of India (RBI) to control inflation. In its bi-annual policy review statement issued earlier this week, RBI, while effecting a 25 basis point cut in the repo rate, had expressed confidence that the 5% consumer price index inflation target by March 2017 will be achieved. Moreover, India’s gross national savings in 2021-22 are expected to be a little over 30% of the GDP, lower than present levels.

What does IMF want India to do, going forward?

IMF wants India to continue to reform its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education and healthcare. “India’s economy has benefited from the large terms of trade gain triggered by lower commodity prices, and inflation has declined more than expected. Nevertheless, underlying inflationary pressures arising from bottlenecks in the food storage and distribution sector point to the need for further structural reforms to ensure that consumer price inflation remains within the target band over the medium term,” IMF says, even as it acknowledges that “important policy actions toward the implementation of the goods and services tax have been taken which will be positive for investment and growth.”

IMF says India needs to work more to enhance efficiency in mining and increase electricity generation. “Additional labour market reforms to reduce rigidities are essential for maximising the employment potential of the demographic dividend and making growth more inclusive,” it says.

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Why IMF’s global economic outlook means both good and bad news for India

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