India is facing a significant growth slowdown that is mostly cyclical, the International Monetary Fund said in its annual report on Monday.
Ranil Salgado, the mission chief for India in the IMF Asia and Pacific Department, told PTI that the new growth projections for India, which will be announced in January, would be significantly lower than the previous ones. In October, the organisations had slashed its forecast for 2019 to 6.1%, and the projection for 2020 to 7%.
“The issue in India currently is the growth slowdown,” said Salgado. “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.”
The report said a combination of factors led to subdued economic growth in the first half on 2019. The monetary fund said declining consumption and investment, coupled with falling tax revenue, caused the Gross Domestic Product growth to decline. Relatively low food prices contributed to “rural distress”, it added in the report that was prepared in August.
Salgado also pointed out the abrupt reduction in non-bank financial companies’ credit expansion and weak income growth. “Some implementation issues with important and appropriate structural reforms, such as the nation-wide goods and services tax may also have played a role,” he added.
The fund said India’s high growth rate in recent years did not lead to a proportionate increase in formal sector jobs, while labour market participation also declined. “Without more inclusive and sustainable growth, India’s potential demographic dividend over the next few decades, from its young and rapidly-growing labour force, could be wasted,” the report warned.
India’s Gross Domestic Product contracted to 4.5% in the July-September quarter – the slowest growth rate in more than six years, and the sixth straight quarter of slowdown. The growth rate in April-June was 5%. Core sectors such as automobiles and manufacturing have also slowed down gradually due to weakened consumer demand and dearth of investments. Wholesale price inflation rose to 0.58% in November from 0.16% the month before.
However, Salgado refused to term the current situation a crisis. “I think that would be going too far to say that,” he told PTI. “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.”
The IMF official emphasised that India was still doing good. “Reserves have risen to record level,” he said. “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.”
In the report, the international organisation’s directors urged the government to take urgent policy actions to address the current downturn. “We have, what we used to call a twin balance sheet problem being in the commercial banks and corporate sector,” said Salgado. “Now we may add additional balance sheet issue, which is on the NDFs. I’m including housing finance companies in that sector that as well. So, the most immediate thing would be to try to have some policies related to restoring the health of this sector.”
However, the government has limited scope to boost spending to support growth, especially given high debt levels and interest payments, according to the fund. Salgado said the Reserve Bank of India still has “room to cut the policy rate further, especially if the economic slowdown continues”. The central bank has cut the key lending rate five times this year to a nine-year low. However, at its last meeting earlier this month, it kept the policy rates unchanged. The RBI has slashed its annual growth forecast to 5% from 6.1%.