IMF sees India hitting 7.5% growth target on strong domestic demand

Dubai: The International Monetary Fund (IMF) on Wednesday said the Indian economy is on a recovery path, helped by a large terms of trade (TOT) gain of 2.5 per cent of gross domestic product (GDP), positive policy actions and reduced external vulnerabilities.

Following the conclusion of the Article IV consultation with India, the IMF’s Executive Board said the economic growth is projected at 7.3 per cent for the 2015-16 fiscal year, picking up to 7.5 per cent in 2016-17, and supported by stronger domestic demand. With the revival of sentiment and a pick-up in industrial activity, an incipient upturn in private investment is expected to help broaden the recovery.

The collapse of global oil prices has boosted economic activity in India, supported by an improvement in current account and fiscal positions, as well as a decline in inflation.

While a range of supply-side measures, including the release of surplus grain buffer stocks and an appropriate monetary stance, have also contributed to the decline in inflation, which fell from an average of about 9.5 per cent during the 2011–13 fiscal period to 5.6 per cent in December 2015.

The IMF observed that in the context of reduced vulnerabilities and improved growth prospects, India had experienced large foreign direct investment inflows in 2015.

As a result, and in conjunction with the continued much-smaller current account, international reserves have increased by $46.7 billion (Dh171.5 billion) since end-March 2014, standing at $350.4 billion at end-December 2015.

Despite the overall positive outlook, persistently high household inflation expectations and large fiscal deficits remain key macroeconomic challenges, resulting in limited policy space to support growth through demand management measures.

Corporate weakness, anaemic exports

Anaemic exports as well as headwinds from weaknesses in India’s corporate financial positions and public bank balance sheets weigh on the economy.

According to the IMF’s assessment, the Reserve Bank brought down inflation to below 6 per cent by January 2016, in the process achieving its inflation target.

Going forward, near-term headline consumer price inflation dynamics will continue to be underpinned by supply-side factors which, despite the sub-par crop outlook, should help the Reserve Bank of India (RBI) achieve its inflation goal of around 5 per cent for March 2017.

Despite the 125 basis points nominal policy rate cut last year, monetary conditions are expected to remain consistent. Despite the recent export slowdown, continued low global oil prices should help contain the current account deficit at around 1.5 per cent of GDP in the 2016-17 fiscal year.

India is expected to meet its 2015-16 fiscal deficit target of 3.9 per cent of GDP, which is equivalent to about 4.25 per cent of GDP in IMF terms. The 2016-17 budget was announced on last Monday.

Disruptive global volatility

While the balance of risks has improved, economic risks remain tilted towards the downside. On the external side, despite the reduction in imbalances and strengthening of buffers, the impact from intensified global financial market volatility could be disruptive — including that from unexpected developments in the course of US monetary policy normalisation or China’s growth slowdown.

In the absence of disruptive global financial market volatility, slower growth in China would have an only modest adverse spillover effect on India, given weak trade linkages.

Domestic risks include continued weaknesses in corporate financial positions and public bank asset quality, as well as setbacks in the reform process, which could weigh on growth, accelerate inflation and undermine sentiment.

IMF executive directors commended the authorities for their appropriate policy actions that, along with favourable terms of trade, have underpinned India’s improved economic performance and reduced external vulnerabilities.

They welcomed, in particular, recent measures aimed at increasing public infrastructure spending, rationalising subsidies, creating more flexible labour and product markets, and enhancing financial inclusion.

Looking forward, the directors’ report noted that global financial market volatility, a potential further deterioration in exports and strains in bank and corporate balance sheets could weigh on India’s growth prospects.

Meanwhile, high fiscal deficits and upside risks to inflation constrain the scope for countercyclical policies.