IMF chants India growth mantra louder but raises inflation concerns

Riding stronger than expected domestic consumption in the first quarter of the current financial year, the Indian GDP might grow at 6.3%, the International Monetary Fund (IMF) said on October 10, pulling up its earlier projection by 20 basis points.

“India is one of the large emerging economies that (have) been doing better than expected for quite a while now. (It) is one of the growth engines in the world economy,” said Pierre-Olivier Gourinchas, economic counsellor and director of the research department, IMF.

The IMF’s latest World Economic Outlook (WEO) retained its global growth forecast at 3% for 2023 and trimmed the projection for 2024 by 10 basis points to 2.9%.

“Growth in India is projected to 2023 (FY24) and 2024 (FY25), with an upward revision of 0.2 percentage (points) for 2023 (FY24), reflecting stronger-than-expected consumption during April-June,” said the IMF.

Incidentally, the World Bank has also predicted the Indian economy to grow by 6.3% earlier this month. The growth rate forecast by Asian Development Bank is also at the same rate, though it was brought down at that level in September from an earlier forecast of 6.4% on the back of erratic rains.

The RBI has forecast a growth rate of 6.5% of the GDP.

However, the IMF sounded a warning bell in the form of higher projection of inflation at 5.5% up from its earlier forecast of 4.6%.

“This is conditional on the monetary policy continuing to be very focused on delivering price stability, and a continuing data-dependent approach. More fiscal consolidation, especially in terms of a medium-term plan will also support monetary policy in reducing inflation,” said Daniel Leigh, division chief, research department, IMF.

Significantly, the IMF report has been made public against the ongoing conflict between Hamas and Israel. One of the warning bells that economists have sounded out loud is that if this conflict carries on, there is a possibility that it might stoke the crude prices further, which has a strong potential to disrupt the growth story of energy-hungry India which imports more than 85% of its annual crude requirements. The IMF projections do not factor in the impact of the geopolitical developments in West Asia.

“We are monitoring the situation very carefully in terms of the economic impact that it may have…but it is too early to assess the impact. It broke out when the current projections were closed. We have to wait a little bit more,” said IMF chief economist Pierre Olivier Gourinchas.

The IMF official said that oil prices increased by about 4%. “This reflects potential disruption on oil prices,” Gourinchas said. He also underscored that a 10% increase in oil prices will depress global output by about 0.15 percentage points. It would also raise inflation by 0.4 percentage points.

“What will also support this effort is more fiscal consolidation, especially in terms of a medium-term plan to reduce debt, which would also support the monetary India’s economy grew 7.8% year- policy and reduce inflation,” said Leigh.

IMF has also stated that the global GDP will decelerate to 3% in 2023 from 3.5% in 2022. The rate will become even slower at 2.9% in 2024. But the multilateral funding agency has upped the growth forecast for Brazil, Russia and Mexico. The largest economy of the world – the US – is also expected to grow at 2.1% in 2023 – higher by 0.3 percentage points. However, IMF sees the Chinese economy to grow at 5% in 2023 compared to the earlier projection of 5.2%.

“The latest projections confirm that the global economy is slowing as inflation declines from last year’s multi-decade peak,” the IMF said.