IMF Cuts Growth Outlook For India to 4.8% for FY20, Drags Global Number Down

The latest outlook from the International Monetary Fund (IMF) has further dented hopes of any potential recovery for the faltering Indian economy.

The agency cut the country's FY20 economic growth to 4.8 per cent from the 6.1 per cent that it estimated in October, citing a sharper-than-expected fall in domestic demand and stress in the non-bank financial sector which has led to a decline in credit growth.

This latest cut comes on the back of the United Nations slashing India's fiscal 2020 growth outlook to 5 per cent from the previous forecast of 5.7 per cent.

India's annual economic growth slowed to its weakest pace since 2013 in the July-September quarter, despite constant rate cuts by the central bank. This slowdown has been felt across sectors, with even traditionally strong sectors such as retail in a tangle. Festive demand, too, failed to keep up in the year amid fears of a widespread consumption slowdown. Unemployment has risen rapidly, rising to its highest rate in more than three years in October.

Such tepid growth and slashing of outlook for India, and some other emerging markets, also led the IMF to reduce its global outlook by 0.1 percentage point to 1.9 per cent.

"The global growth trajectory reflects a sharp decline followed by a return closer to historical norms for a group of underperforming and stressed emerging markets and developing economies," the IMF noted.

Not Too Bright

IMF projects a growth of 5.8 per cent in 2020 for India and 6.5 per cent the following year, helped by monetary and fiscal stimulus as well as subdued oil prices. However, the numbers are still sharply lower from its October forecast. The 2020 growth saw a 1.2 percentage point cut while the new 2021 outlook is 0.9 percentage point lower.

In line with its cuts for India, IMF similarly cut the global economic growth outlook to 3.3 per cent for 2020, 0.1 percentage point lower than previous estimates, and 3.4 per cent for 2021, 0.2 percentage point below the earlier estimates.

A large part of India's economic problems have been due to a crisis for non-banking financial companies (NBFCs). A flawed model where short-term funds were lent out as long-term loans, the cycle was broken by a default of some firms of the IL&FS group. With the incident scaring investors, the larger sector's fallacies have been exposed, and a credit crisis has since followed.

The incumbent government has taken several steps to stimulate the economy in recent months such as corporate tax cuts and real estate fund for housing projects under stress, among others. The upcoming budget, that would be presented by finance minister Nirmala Sitharaman on February 1, is expected to include more such steps to stem the slowdown and lift growth.

Policy-wise, IMF suggested economies to enhance inclusiveness, ensure that safety nets protect the vulnerable and government structures strengthen social cohesion.

Across the emerging markets and developing economies group, the agency said, "An overarching shared objective is to make growth more inclusive through spending on health and education to raise human capital, while at the same time incentivizing entry of firms that create high value-added jobs and gainfully employ wider segments of the population."