The IMF headquarters in Washington. Photo: Wikimedia Commons
“The International Monetary Fund (IMF) said on Tuesday that growth in the Indian economy had bottomed out and would recover on the back of improved external demand and recent policy moves by the Indian government.
“External demand, solid consumption, a better Monsoon season, and policy improvements are expected to lift activity in India,” it said.
It however cautioned that this forecast was subject to downside risks.
IMF in its World Economic Outlook pared down India’s growth projection to 5.7% for 2013 calendar year from its earlier projection of 5.9% for the same year in January this year, holding that “significant structural challenges” will likely lower potential output over the medium term and also keep inflation elevated by regional standards.
IMF also cut its global growth outlook to 3.3% and urged European policy makers to use “aggressive” monetary policy as a second year of contraction leaves the euro area’s recovery lagging behind the rest of the world.
In January, IMF had forecast that the global economy would expand 3.5%. It grew 3.2% in 2012. IMF also sees the 17-country euro area shrinking 0.3%.
New Delhi has projected India’s economy to grow at 6.2–6.7% in 2013-14 while the Asian Development Bank last week said growth may pick up by 6% during the same fiscal. IMF’s growth projections are not strictly comparable with other such projections as the Fund estimates GDP using market prices while Indian government uses the factor cost method. The Fund’s projections are also for the calendar year while India follows the April to March fiscal year.
The main risk, according to IMF, is the potential reversal of easy external financing conditions and favorable commodity prices for emerging economies including India.
“Were investment to disappoint in the BRICS (Brazil, Russia, India, China, South Africa), the result would be significantly reduced global growth, inflation, and commodity prices. If this came with capital outflows, the effect on BRICS output would be appreciably larger,” the Fund said. .
IMF further cautioned that such contagion may spread to many other emerging market economies. which could lead to global growth dipping to about 1.5%, implying a decline in output per capita: “the first such recession in global output per capita to originate in emerging market economies.”
Holding that India continues to face “significant fiscal challenge”, the Fund called for more immediate fiscal action to safeguard against adverse debt dynamics because of lower growth potential or the rising cost of private or government financing.
“Further structural reform, including subsidy reform, higher revenue from consumption taxes, and broader tax bases, would facilitate faster consolidation,” it added.
IMF also cautioned against the rising pressure of bad loans especially on public sector banks which account for 73% of banking assets.
“Gross nonperforming assets in public banks reached 3.3% of advances in 2012. However, the long-run risk may be underestimated, as historically about 15% of assets reported as “restructured” (a category that likely accounted for 7.3 percent of the public banks’ assets as of September 2012) are eventually classified as nonperforming,” it said.
It said state-owned bank portfolios remain vulnerable to losses from delayed infrastructure projects and, most importantly, to the recent growth slowdown that has dented the profits of the large companies that account for the bulk of Indian banks’ loan portfolios.
IMF said current account deficit will remain elevated in 2013 at 4.9% compared to 5.1% while consumer price inflation is expected peak up in 2013 to 10.8% from 9.3% in 2012.
Data released on Friday showed India’s retail inflation moderated in March, even though it continued to remain above the double-digit mark. In February, CPI-based inflation was 10.91%.
IMF said it expects India to grow 6.2% in 2014. It projects the global economy to expand 4.1% in the same year.
Bloomberg contributed to this report.
Source : Live Mint