The International Monetary Fund (IMF) said that growth in India has slowed down more than anticipated and the country must maintain fiscal and monetary credibility in order to prevent capital outflows.
In the World Economic Outlook released on Tuesday, IMF further cut India’s current fiscal growth projection to 3.8% from 5.6% as projected in July and 5.7% as expected in April.
This is in line with the reduced forecast for world economic growth which was reduced from 3.1% to 2.9% which would be the slowest in four years.
Rupa Duttagupta, deputy chief of the World Economic Studies Division at the IMF, said that growth in India has slowed down quite sharply due to a number of domestic factors.
“On the structural side, we are still seeing that investment recovery is very slow. There are supply side constraints, especially in power sector,” she said, adding that the current tight liquidity conditions and high rate of inflation have led to the downward revision of growth in the current fiscal.
However, growth could pick up in the next financial year on account of better agricultural produce and higher exports aided by a depreciating rupee. The IMF also cut growth forecast for the next financial year to 5.1% from 6.3% as projected in July.
She said that countries like India continue to face risk of higher capital outflows as seen in the recent past. “Hence, it is very important for India to maintain credibility in monetary and fiscal policies,” said Duttagupta.
She said that the country’s central bank took the right decision on September 20 by hiking the policy (repo) rate (by 25 basis points to 7.5%, against market expectations of a status quo) in response to high inflation.
The IMF said India is among the economies that may require more tightening to address inflation pressures.
On the fiscal front, the IMF said India must meet its fiscal deficit target, come what may.
“India should see that the fiscal deficit target is maintained even if additional measures are needed,” said Duttagupta after releasing the World Economic Outlook.
The government has pegged fiscal deficit at 4.8% for this fiscal. Finance minister P Chidambaram reiterated recently that the government will remain within the target. This is despite the fact that the government already crossed 74% of the yearly target in the first five months of the fiscal.
According to Chidambaram, the government had front-loaded the planned expenditure and things would even out over the rest of the year. (All estimates discussed in this report are at market prices.)