Domestic engines to power India's growth: IMF

In an update to its World Economic Outlook, the multilateral agency raised its growth projection for India to 6.7% and 6.5% for FY24 and FY25, respectively, against 6.3% earlier projected for both years. The IMF, which also revised India’s FY26 forecast to 6.5%, up by 20 basis points, said high interest rates aimed to counter inflation and the withdrawal of fiscal support amid high debt may weigh on growth in FY25.

 

“Growth in India is projected to remain strong at 6.5% in both 2024 (FY25) and 2025 (FY26), with an upgrade from October of 0.2 percentage points for both years, reflecting resilience in domestic demand," the IMF said. For India, data and projections are presented by the IMF on a fiscal year (FY) basis, with FY24 (starting in April 2023) shown as 2023 by the agency.

The IMF report, titled ‘Moderating Inflation and Steady Growth Open Path to Soft Landing’, attributed India’s upgrades to stronger-than-expected growth in 2023 and increased government spending on capacity building against natural disasters.

Following the release of the IMF report, the finance ministry said on social media platform X, “The IMF has revised upward medium-term (potential) GDP growth to 6.5% (from 6.3%) reflecting strong public investment, positive labour market outcomes in the latest PLFS (Periodic Labour Force Survey) report, and adjustments to our model."

“The IMF continues to view the external sector as strong and is narrowing its current account deficit projection for FY24 from 1.8% (of gross domestic product, or GDP) to 1.6%. India continues to be the fastest-growing economy among the major economies of the world," it added.

The IMF also raised 2024 growth projections for Russia (from 1.1% to 2.6%), the US (from 1.5% to 2.1%) and China (from 4.2% to 4.6%), while it slashed Europe’s growth (from 1.2% to 0.9%) for the same period.

“The global economy has been surprisingly resilient, with growth now projected at 3.1% in 2024 and 3.2% in 2025," IMF chief economist Pierre Olivier-Gourinchas said in a press briefing following the release of the report. “Inflation is falling faster than anticipated in most regions, thanks to the easing of supply-side pressures and restrictive monetary policy. The likelihood of a hard economic landing has decreased due to faster disinflation and steady growth," he added.

The IMF expects the global headline inflation rate to decrease to 5.8% in 2024 and 4.4% in 2025, with the forecast for 2025 revised down.

The report comes days ahead of India’s interim budget on 1 February, which is expected to help insulate the economy from global headwinds and geopolitical uncertainty while sticking to the path of fiscal consolidation.

Economists agreed with the IMF assessment, expecting India to report strong growth despite the ongoing geopolitical challenges and a relatively slowing world economy.

“India emerged out of the dual global crisis of pandemic and geopolitical fallouts relatively better than many of its peers. Public capital expenditure, India’s domestic demand and a healthy farm sector were largely instrumental in this recovery," said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.

“However, these drivers could take a back seat in FY25 as also indicated by the IMF. Going forward, to maintain this growth momentum, private capex needs to kick in. The IMF’s evaluation for FY25 should be considered by the RBI (Reserve Bank of India) in fast-tracking a monetary policy shift sooner than later, to reduce capital costs for Indian institutions," he added.

The IMF growth forecast, though, is slightly below the RBI’s projection of 7% GDP growth for FY24. India’s National Statistical Office (NSO) earlier this month projected the economy to expand by 7.3% in FY24, as per the first advanced estimates, after the economy reported growth of 7.8% and 7.6%, respectively, in the first two quarters of the ongoing fiscal year. At this pace, India will retain its crown as the fastest-growing major economy, following its 7.2% GDP growth in FY23. The NSO will release the second advance estimate on 29 February.

The first advance estimate employs the benchmark indicator method and draws on provisional data from high-frequency indicators. Comparing these indicators with the preceding year’s figures, the government assesses the performance of various high-frequency indicators in the initial two or three quarters of the fiscal year.

The assessment incorporates provisional figures of consumer inflation, the Index of Industrial Production (IIP), revised fiscal estimates, and financial results from listed companies, among other key indicators. The finance ministry will incorporate this first advance GDP estimate into its budgetary calculations.

The IMF, though, expects central banks worldwide to begin easing interest rates only in the second half of 2024. “We are almost there (lower interest rate regime), but not quite there," Olivier-Gourinchas said.

Meanwhile, in its monthly economic review for January released on Monday, the finance ministry said it expects FY24 economic growth to exceed the central bank’s projection of 7% while also expecting growth in the following year, FY25, to be close to 7%, even though geopolitical risks could lead to supply chain disruptions and a rise in inflation.

The ministry’s latest monthly economic review also said that under reasonable assumptions, India can aspire to become a $7 trillion economy by 2030, adding that in the next three years, the country is expected to become a $5 trillion economy, the third largest in the world, and the government has set a higher goal of becoming a “developed country by 2047."