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India growth outlook: Does IMF’s optimism hold?.

Date: 10-08-2018
Subject: India growth outlook: Does IMF’s optimism hold?
India has transitioned into one of the fastest-growing economies in the world in recent years, despite a plodding global business environment, thanks to market liberalisation, incentivisation of FDI inflows, and the implementation of the GST and IBC. This has happened against the backdrop of RBI’s inflation-targeting and the demonetisation move. The International Monetary Fund, in its annual outlook on India’s economic indicators, has predicted a growth rate of 7.3% for the current fiscal year and 7.5% for FY20. Gross investment as a percentage of GDP is projected to jump to 32.2% this year, from 30.6% in FY18. This most likely is due to continued government fixed capital formation. The IMF also predicts that growth in merchandise exports will be a strong 13.2% this fiscal year, the highest rate of growth in exports since 2011-12. Perhaps the depreciation of the rupee will be a catalyst for this, but with global growth expected to slow, if not fall, such expectations need to be looked at carefully.

Following transitory disruptions to growth in the past two years, India’s economic performance is projected to recover in FY19 and strengthen marginally in FY20 as stabilising macroeconomic policies and on-going structural reforms continue to bear fruit. High foreign reserve buffers have helped contain external vulnerabilities. Key external risks—higher global oil prices and tighter global financial conditions—have become sizeable in recent months, but they are expected to become milder in the coming months. Domestic risks, including tax revenue shortfalls, delays in addressing the twin bank-corporate balance sheet problems, the shifting of political motivations due to the upcoming general elections in 2019, and the resulting budgetary pressures, however, need to be looked at carefully and hedged against.

To sustain the on-going revival of growth, the Fund has recommended further rate rationalisation and simplification of the GST regime, monetary policy tightening (interest rate revision) due to a narrowing output gap and rising inflation, exchange rate flexibility and the miserly usage of foreign exchange reserves for the same, and governance- and procurement-related reforms such as the deregulation of the labour market, easing of land procurement methods, and improving the function of governance, especially in public sector enterprises.

Source: financialexpress.com

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