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IMF’s latest news may not be bad news for India if it plays its cards right

In the latest World Economic Outlook (WEO) released on Tuesday, the International Monetary Fund (IMF) has lowered the projected growth rate for the world economy to 3.2% in 2022 and to 2.9% in 2023, from the 3.6% it had earlier projected for each year. Putting these numbers in perspective, during the current as well as next year, the world economy is expected to grow at a rate slower than the average decadal growth rate of 3.7% prior to the Covid pandemic, or that of 4.2% prior to the Global Financial Crisis.

IMF has attributed the growth downgrades to exceptional tightening of monetary policy around the world in the wake of high and persistent inflation, the impact of Covid-induced lockdowns in China, and the impact of the prolonged Russia-Ukraine war.

A Deeper Dip

That is not all. It has cautioned that the growth out-turns may be even lower than the latest downgraded rates. The downside risks stem from the Russia-Ukraine war getting further prolonged, inflation turning out to be sticky despite aggressive policy actions, and the persistence of Covid that could continue to result in restrictions on mobility and economic activity. Conditional on these risks materialising, global growth could decline further to about 2.6% and 2% in 2022 and 2023, respectively.

In line with the revisions for most other countries, IMF has also downgraded the outlook for India's growth rate from its earlier projection of 8.2% to 7.3% for the current year, and to about 6% for next year.

IMF's prognosis raises two questions.

  • Are these revised projections reasonable for India?

  • In what way can this outlook guide the policy framework for India?

The magnitude of the downgrade for the current year is the fourth largest for India, less than only the downgrades for the US, China and Germany, at 1.4, 1.1, and 0.9 percentage points, respectively. The downgrades for these economies have been attributed to their unique circumstances, including high and persistent inflation in the US necessitating aggressive monetary policy actions, China's 'zero-Covid' policy resulting in severe lockdowns, and Germany bearing the brunt of the war in Ukraine and an unprecedented level of inflation.

India has been impacted primarily by the spillovers of global shocks, rather than specific home-grown challenges. Its economy has been adversely affected by the high oil prices and tightening of the monetary policy in the US, resulting in the reversal of capital flows. Its growth downgrade may be attributed as much to IMF's objective of correcting the erstwhile unduly optimistic projected growth rate of 8.2% as to these spillovers.

The revised projected growth rate of 7.3% for India is closer to the official estimates and seems more realistic. If the global environment turns out to be as grim as projected by IMF, the growth out-turn for India this year may be even slower at, or a bit below, 7%.

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