lauding New Delhi’s push on some key reforms, notably passage of the Goods and Services Tax (GST) legislation, the International Monetary Fund has raised India’s growth projection to 7.6 per cent for 2016-17, terming it the fastest growing nation among major economies.
In its newly-released World Economic Outlook, the IMF speaks of India’s continued strong economic recovery, benefiting from improved terms of trade, effective policy actions and stronger external buffers, all of which have helped boost sentiment.
While raising India’s growth projection by 0.2 per cent from the 7.4 per cent it had forecast in July, the IMF has nonetheless underlined the need for further structural reforms to ensure that consumer price inflation remains within the target band over the medium term.
Ahead of its annual meetings here this weekend, the IMF sees global growth to remain subdued, raising fears that stagnation could fuel calls for protectionism in different parts of the world.
“Global growth is projected to slow to 3.1 percent in 2016 before recovering to 3.4 percent in 2017,” it said, attributing its 0.1 per cent downward revision for the world economy in 2016 and 2017 to a more subdued outlook for advanced economies following Britain’s decision to quit the European Union and a weaker-than-expected growth in the United States.
China’s economy, expected to grow by 6.6 per cent in 2016 on the back of policy support, is projected to decelerate to 6.2 per cent in 2017 in the absence of further stimulus.
In its overview of the Indian economy, the IMF says it has benefited from the large terms of trade gain triggered by lower commodity prices, and inflation has declined more than expected. Even so, underlying inflationary pressures arising from bottlenecks in the food storage and distribution sector will have to be tackled with further structural reforms.
Welcoming the forward movement on GST, the IMF said its implementation will benefit investment and growth, adding: “This tax reform and the elimination of poorly targeted subsidies are needed to widen the revenue base and expand the fiscal envelope to support investment in infrastructure, education and health care.”
It called for additional measures to enhance efficiency in the mining sector and increase electricity generation are required to boost productive capacity. It also highlighted the need for additional labour market reforms to reduce rigidities and maximize the employment potential.
The IMF also spoke of the need for continued efforts by the Reserve Bank of India to strengthen bank balance sheets through full recognition of losses and increasing bank capital buffers to improve the quality of domestic financial intermediation.
The World Bank, meanwhile, expects India’s solid performance to help the whole South Asia region remain “a global growth hotspot”, resilient to external headwinds such as China’s slowdown, uncertainty around stimulus policy in advanced economies and slowing remittances.
In its biannual South Asia Economic Focus, the Bank, like the IMF, expects India’s growth to remain strong at 7.6 per cent in both 2016 and 2017, supported by expectations of a rebound in agriculture, civil service pay reforms supporting consumption and increasingly positive contributions from exports and a recovery of private investment in the medium term.
“However, India faces the challenge of further accelerating the responsiveness of poverty reduction to growth, promoting inclusion, and extending gains to a broader range of human development outcomes related to health, nutrition, education and gender,” the Bank report noted.