International Monetary Fund (IMF) raised projections for India's economic growth by 0.2 percentage points to 7.6 per cent for 2016-17 and 2017-18. The projections came at a time when it retained global economic growth at 3.1 per cent for 2016 and 3.4 per cent for 2017.
In its World Economic Outlook, IMF also kept gross domestic product (GDP) expansion for China unchanged at 6.6 per cent in 2016 which would decelerate to 6.2 per cent in 2017. That way India would keep its position of fastest growing large economy that it snatched from China in 2015-16.
"India’s GDP will continue to expand at the fastest pace among major economies, with growth forecast at 7.6 percent in 2016–17," it said in its outlook released three days ahead of its annual meetings along with the World Bank in Washington.
IMF however cautioned India that weak corporate and public sector banks balance sheets would restrict private investment in near term where RBI's continued role to increase lenders' capacity to give loans would be critical. It highlighted the importance of goods and services tax (GST) which is targeted to be introduced from April one, 2017 and elimination of poorly targeted subsidies.
IMF had released its previous estimates through an update in July. However, if looked from the April outlook, the global growth was cut by 0.1 percentage point each for 2016 and 2017, while it was raised for India by 0.1 percentage point for 2016-17 and 2017-18.
IMF's projection is more or less in line with the finance ministry's optimism that the growth would be towards upper band of its projections -- 7-7.75 per cent-- in the current financial year.
However, it is higher than what ADB and Fitch predicted (see table). India's economy expanded 7.6 per cent in 2015-16, so IMF's projections also mean that the GDP growth would remain stagnant for three consecutive years. The growth rate was five-quarter low at 7.1 per cent in the first three months of the current financial year.
IMF also projected India's economic growth rate to touch 8.1 per cent in 2021-22. Fitch had said on Monday that India's GDP growth could touch 8 per cent only in 2018-19, as it expects the benefits of reforms and impact of monetary easing to kick in with a lag. IMF did not give projections for 2018-19 and 2019-20.
It said India’s economy continued to recover strongly, benefiting from a large improvement in the terms of trade triggered by lower commodity prices, effective policy actions and stronger external buffers which have helped boost investment. Inflation has declined more than expected, it said. Consumer price index-based inflation fell to a five-month low of 5.05 per cent in August from 6.07 per cent in July. IMF projected inflation to average 5.5 per cent in the current financial year and decelerate to 5.2 per cent next year.
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, the Fund said.
Additional labour market reforms to reduce rigidities are essential for maximizing the employment potential of the demographic dividend and making growth more inclusive in India, it said.