London
The International Monetary Fund (IMF) on Tuesday raised its growth projection for India’s GDP in the current fiscal year 2024/25 to 6.8%, and forecast a 6.5% expansion next year. The latest FY25 forecast is a 0.3 percentage point upward revision from January’s projection, the IMF said in its World Economic Outlook April 2024, released on Tuesday to kick off the World Bank IMF Spring Meetings.
The global economy had remained “remarkably resilient” with steady growth and inflation returning to target and had “defied expectations of stagflation and global recession” in the wake of the post-pandemic supply disruptions, Russia’s invasion of Ukraine and subsequent global energy and food crises as well as the monetary tightening across economies, the IMF observed.
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It projected global output growth in 2024 and 2025 at 3.2%, after bottoming out at at 2.3% at the end of 2022.
Liberalise foreign investment, boost exports
The projected moderation in India’s growth rate from 7.8% last fiscal year was due to a tightening in monetary and fiscal policy, necessary to bring inflation down, IMF economist Daniel Leigh said at a press briefing on Tuesday to release the report. Inflation was projected to be 4.6% this year and 4.2% next year, Mr. Leigh added.
The growth projections could be higher than expected due to strengthening private demand, he added.
“Also, an upside comes from the potential for reforms that would liberalise foreign investment and really boost exports and boost jobs and labour force participation,” he said, partly in response to a question from The Hindu on policy recommendations for the Indian economy and addressing unemployment concerns.
“So, it’s a very strong outlook and there’s a balanced risk outlook,” he added.
For the global economy, the IMF expected median headline inflation to ease from 2.8% at the end of this year to 2.4% at the end of 2025.
“Most indicators point to a soft landing,” the report said.
“Another piece of good news is that we project less economic scarring,” IMF Chief Economist Pierre-Olivier Gourinchas said during a virtual briefing with journalists on Friday. Scarring, or the gap in output compared with pre-pandemic levels, was less in most regions with the exception of low income and developing countries, he said.
Risks to global growth remain
While global growth did better than expected, the expansion was still low compared with historical standards, due to high borrowing costs, weak productivity growth, withdrawal of fiscal support, the longer-term impacts of the pandemic and Russia’s invasion of Ukraine as well as geo-economic fragmentation, the IMF said. Global growth was projected at 3.1% five years from now – the lowest such forecast in decades.
The IMF called for vigilance, saying that while inflation numbers were encouraging, recent numbers were pushing upward. Most of the slowing in inflation was due to falling energy prices and goods inflation being below historical averages, but services inflation remained high and could derail this disinflation path, the IMF cautioned, suggesting that lowering inflation should remain the priority.
The Fund also recommended that countries start building their fiscal buffers, i.e., to undergo credible fiscal consolidation which would lower borrowing costs and improve financial stability.
The global picture could be masking “stark divergences” between countries, the IMF warned, and that while the “exceptional” recent performance of the U.S. was a driver of growth globally, it reflected strong demand side factors and was not fiscally sustainable in the long term. The U.S. was projected to grow at 2.7% in 2024 and 1.9% in 2025.
The U.S. was expected to begin fiscal consolidation in 2024, Mr. Gourinchas said at Tuesday’s press briefing, and this explained – in part - the moderation in growth in 2025. While the movement was in the right direction, the IMF was concerned that it was not enough, and not necessarily sustained over a long enough period to bring GDP levels into a “more comfortable” zone.
Improve Human Capital in Developing Countries
Focussing on growth-enhancing domestic and foreign investment and bolstering resource mobilisation within low income developing countries could help them accelerate development and lower borrowing costs, the IMF said. It also recommended improving the human capital of large young populations – in line with the World Bank’s report on the South Asian region released earlier in April , which warned that South Asian countries were not capitalising on their demographic dividends.
The “main culprit” behind weak medium-term growth prospects was lower total factor productivity, stemming from a misallocation of labour and capital within sectors and countries. The IMF subsequently discusses immigration to the West – a politically sensitive topic in advanced economies and an electoral issue in a year when the U.S. and several European countries have either voted or will be going to the polls.
Countries enjoying a demographic dividend could support global labour supply, according to the Fund, which noted that in the medium term, almost two of three work force entrants would come from India or sub-Saharan Africa.
“The global imbalance in labour supply also hints at the importance of migrant workers for advanced economies,” the IMF pointed out.
