IMF: India in midst of significant economic slowdown

In its report released Monday, the IMF Directors noted that India’s rapid economic expansion in recent years has lifted millions of people out of poverty. However, in the first half of 2019, a combination of factors led to subdued economic growth in India.

“The issue in India currently is the growth slowdown. We still believe it is mostly cyclical, not structural... because of the financial sector issues, we think, the recovery will be not as quickly quick as we thought earlier. That’s the main issue,” Ranil Salgado, Mission Chief for India in the IMF Asia and Pacific Department said in an interview as it released its annual staff report on India.

With risks to the outlook tilted to the downside, the IMF Directors called for continued sound macroeconomic management. They saw an opportunity with the strong mandate of the new government to reinvigorate the reform agenda to boost inclusive and sustainable growth, the report said. The staff report was done in August when the IMF was not fully aware of India’s current economic slowdown.

“India is now in the midst of a significant economic slowdown,” Salgado told reporters.

Growth in the second quarter of FY 2019/20 came in at a six-year low of 4.5 per cent (y/y), and the composition of growth indicates that private domestic demand expanded by only 1 per cent in the quarter. Most high-frequency indicators suggest that weak economic activity has continued into December, he said.

Salgado attributed this to the abrupt reduction in non-bank financial companies’ (NBFC) credit expansion and the associated broad-based tightening of credit conditions appears to be an important factor and weak income growth, especially rural, has been affecting private consumption.

Private investment has been hindered by the financial sector difficulties (including in the public sector banks (PSBs)) and insufficient business confidence, he said. Some implementation issues with important and appropriate structural reforms, such as the nation-wide goods and services tax (GST), may also have played a role, he added.

To a question, Salgado said the new growth projections for India, which will come out in January, would be significantly lower than the previous ones. “By other measures, India still is doing well. Reserves have risen to record level. The current account deficit has narrowed. Inflation, although we have a little jump right now because of vegetable prices, we think (it) has been under control for the last few years. So, by other measures, India is doing quite well. The issue is primarily how to address the growth slowdown,” Salgado said.

Responding to a question, he said the IMF has been surprised on India’s slowdown. But he responded in negative if this slowdown can be described as an economic crisis. “I think that would be going too far to say that. What we have seen is a growth slowdown. It may be longer than we had originally anticipated. But other elements like on the external side, on inflation, those are under controlled,” he said.