IMF cites less favourable external conditions and rapid policy tightening by RBI as reasons for lowering India’s growth outlook
New Delhi, NFAPost: The International Monetary Fund (IMF) on Tuesday slashed growth forecast for India by 80 basis points to 7.4 per cent for FY23 citing less favourable external conditions and rapid policy tightening by the central bank.
In its update to the April World Economic Outlook, IMF said though a global recession in 2022 is ruled out with growth estimate of 3.2%, the balance of risks is squarely to the downside, driven by a wide range of factors that could adversely affect global economic performance.
“The risk of recession is particularly prominent in 2023, when in several economies growth is expected to bottom out, household savings accumulated during the pandemic will have declined, and even small shocks could cause economies to stall. For example, according to the latest forecasts, the United States will have real GDP growth of only 0.6% in the fourth quarter of 2023 on a year-over-year basis, which will make it increasingly challenging to avoid a recession,” it added.
The IMF said further lockdowns and the deepening real estate crisis in China have led growth to be revised down by 1.1% points to 3.3% for 2022, with major global spillovers.
“Downgrades for China and the United States, as well as for India, are driving the downward revisions to global growth during 2022–23, which reflect the materialization of downside risks highlighted in the April 2022 World Economic Outlook,” it added.
The IMF said for emerging markets and developing economies, the negative revisions to growth reflect mainly the sharp slowdown of China’s economy and the moderation in India’s economic growth.
The multilateral lender said global trade growth in 2022 and 2023 will likely slow by more than previously expected, reflecting the decline in global demand and supply chain problems. “The dollar’s appreciation in 2022 — by about 5% in nominal effective terms as of June compared with December 2021 — is also likely to have slowed world trade growth, considering the dollar’s dominant role in trade invoicing as well as negative financial balance sheet effects on demand and imports in countries with dollar-denominated liabilities,” it added.
As advanced economy central banks raise interest rates to fight inflation, IMF said widespread capital flight from emerging market and developing economies could amplify this risk.
On policy priorities for economies, IMF said at this juncture, focus should be to bring inflation under control, as price stability was a precondition for durable growth in economic well-being and financial stability.
“Economies in which underlying inflation and inflation expectations have risen persistently and significantly above target levels need to take decisive action to tighten monetary policy, with central banks shrinking their balance sheets and raising real interest rates. In the near term, such policies reduce inflation at the cost of lower real activity, higher unemployment, and lower wages,” it added.
