By Prarthana Mitra
The International Monetary Fund (IMF) on Tuesday accredited India’s economic growth to the economic reforms implemented by the Narendra Modi government, putting India on the path to becoming the world’s fastest-growing major economy this year and the next.
Released ahead of the IMF annual meeting in Bali, the World Economic Outlook (WEO) report noted, “In India, important reforms have been implemented in recent years, including the Goods and Services Tax, the inflation-targeting framework, the Insolvency and Bankruptcy Code, and steps to liberalize foreign investment and make it easier to do business.”
This comes just a week after Harvard economist Gita Gopinath became IMF’s new chief economist and denounced demonetisation, calling it a failed macroeconomic policy.
The growth rate for 2018-2019
Regarding Prime Minister Modi’s 2016 drive to issue new currency and syphon black money out of the system, the report acknowledged that a rebound from the transitory shocks of demonetisation was on the cards. That said, “the implementation of the national Goods and Services Tax” and “strengthening investment and robust private consumption” ensures very little setback to the present rate of growth, which is up from 6.7% in 2016.
The report does cite the recent fuel price hike and falling rupee to justify cutting India’s growth projection by 0.1% (the report lowered China’s growth rate by 0.2%). China, the second largest growing economy, will take a hit, predicted IMF, owing to “the latest round of US tariffs on Chinese imports.”
The earlier projection, made in July for next year, has been brought down to a growth of 7.4 %, which still puts India as the world’s fastest-growing major economy. Beyond 2019 too, India’s economic growth is likely to continue “owing to structural reforms and a still-favourable demographic dividend,” according to IMF.
Reform priorities for India include “reviving bank credit and enhancing the efficiency of credit provision by accelerating the cleanup of bank and corporate balance sheets and improving the governance of public sector banks”. Debt reduction is of paramount importance, in order to establish policy credibility and build buffers. All such efforts should be supported by greater subsidies and compliance with the Goods and Services Tax, WEO noted.
Global economy is experiencing a lull before the storm
The overall global economic growth has been slashed by 0.2 per cent. Outgoing IMF Chief Economist Maurice Obstfeld warned that “there are clouds on the horizon” and “the likelihood of further negative shocks to our growth forecast has risen,” referring to tightening economic policies, especially in the US.
“In several key economies, the WEO noted, “growth is being supported by policies that seem unsustainable over the long term,” WEO said, warning advanced economies of the consequences of complacency.
Prarthana Mitra is a staff writer at Qrius.