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IMF revises India growth forecast, sees GDP shrinking at sharper 8% in FY21 – Business Standard

The International Monetary Fund (IMF) has pegged contraction in India’s economy at eight per cent in the current financial year, higher than 7.7 per cent projected by the official advance estimates. However, it expected the growth to rise to 11.5 per cent in the next financial year before slowing down to 6.8 per cent, helping the economy regain its tag of the fastest growing large economy in the world in both the years.

In the World Economic Outlook released on Tuesday, IMF said the second quarter GDP numbers for India surprised it on the upside. India’s economy declined by 7.5 per cent in the quarter, while most experts had expected it to be in the double digits. The Fund was also surprised on the upside by the growth numbers for Australia, Euro Area, Japan, South Korea, New Zealand, Turkey and the United States for the same quarter.

The IMF had earlier expected India’s economy to decline by 10.3 per cent in FY21. However, the second quarter figure helped it revise the number. The IMF had also projected the economy to grow by 8.8 per cent in FY22, but now it has revised it up by 2.7 percentage points.
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The growth numbers for the next financial year have their importance for the Budget, which will be tabled in Parliament in less than a week. The Budget assumes economic growth at current prices, which has an inflation component in it. If it also projects the economy to grow by 11.5 per cent and assumes an inflation rate (called deflator in the GDP methodology) of 3.5 per cent, as projected by advance estimates for 20120-21, the GDP growth would be 15 per cent for the next financial year. Then all the important calculations such as tax collections, fiscal deficit, revenue deficit would be calculated based on this number. A 15 per cent growth would mean robust tax collections, though fiscal deficit remains high as the government might go for high capex to revive the economy. Health outlay may also add to the expenditure side.

Spain, UK, Italy and France were projected by the IMF to witness sharper contraction in the economy than India.

The IMF projected the global growth contraction for 2020 at 3.5 per cent, 0.9 percentage point less than projected in the previous forecast, reflecting stronger-than-expected momentum in the second half of 2020.

It said although recent vaccine approvals have raised hopes of a turnaround in the pandemic later this calendar year, renewed waves and new variants of the virus pose concerns for the outlook. Amid exceptional uncertainty, the global economy is projected to grow 5.5 percent in 2021 and 4.2 percent in 2022. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.
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“The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors,” it said.

The projection for the global growth could be raised if further favorable news on vaccine manufacture (including on those under development in emerging market economies), distribution, and effectiveness of therapies could increase expectations of a faster end to the pandemic than assumed in the baseline, boosting confidence among firms and households

On the downside, growth could turn out weaker than projected now if the virus surge (including from new variants) proves difficult to contain, infections and deaths mount rapidly before vaccines are widely available, and voluntary distancing or lockdowns prove stronger than anticipated.