In its report after annual consultations with India, IMF said that the country’s growth is expected to moderate as it is navigating a “very difficult” external environment.
“Growth is expected to moderate reflecting the less favorable outlook and tighter financial conditions,” it said.
For the next financial year 2023-24, GDP is projected to grow at 6.1%.
The Executive Board of IMF concluded the Article IV consultation with India on November 28. Apart from GDP projection, here are some of the key observations made:
* Economy rebounded from pandemic lows
The IMF in its report highlighted that Indian economy has rebounded from the deep pandemic-related downturn.
As real GDP grew by 8.7% in previous financial year 2021-22, total output jumped to above pre-pandemic levels.
“Growth has continued this fiscal year, supported by a recovery in the labor market and increasing credit to the private sector,” it said.
The Executive Directors concurred that the authorities appropriately responded to post‑pandemic economic shocks with fiscal policy measures to support vulnerable groups and with front‑loaded monetary policy tightening to address elevated inflation.
* Uncertainty around outlook
According to the IMF, over the medium term, reduced international cooperation can further disrupt trade and increase financial markets volatility.
Domestically, rising inflation can further dampen domestic demand and impact vulnerable groups.
The report said that a sharp global growth slowdown in the near term would affect India through trade and financial channels.
Further, it warned that intensifying spillovers from the war in Ukraine can cause disruptions in the global food and energy markets, with significant impact on India.
“On the upside, however, successful implementation of wide‑ranging reforms or greater than expected dividends from the remarkable advances in digitalization could increase India’s medium‑term growth potential,” the report said.
* Rate hikes should be done carefully
India’s future interest rate hikes should be carefully calibrated and its intervention in the foreign exchange market should be limited to managing volatility, IMF said.
“Inflation pressures have led to an appropriate shift towards policy tightening,” IMF said in an annual consultation report. The report is prepared by IMF staff in accordance with its Article IV of Agreement, which requires the fund to hold annual consultations with officials from member states about economic development and policies.
“Additional tightening should be carefully calibrated and communicated,” it added.
The Reserve Bank of India (RBI) has raised its key policy rate by 225 basis points since May, taking the rate to the highest in over three years.
The fund said the exchange rate should act as a “shock absorber” and that the RBI should only intervene to address disorderly market conditions.
* Ambitious fiscal consolidation
Fiscal consolidation should be more ambitious than the current baseline, targeting additional general government primary consolidation of around 1% of GDP by 2027/28, the report said. The government is targeting a fiscal deficit of 4.5% of GDP by 2025/26. It does not have a 2027/28 target.
It said the government can reverse tax cuts on fuel and phase out support to vulnerable groups through the existing transfer system. India has spent nearly $47 billion for its food programme since April 2020.
IMF also said other pandemic related schemes such as government credit guarantees for small industries can be unwound.
“In the short-term, fiscal consolidation would also support the RBI’s efforts to maintain price stability,” the fund said.