The International Monetary Fund (IMF) has lowered its growth forecast for India for the fiscal year 2024-25 to 6.3%, down from the earlier projection of 6.8%. The IMF cites the recent surge in Covid-19 cases in India, which has led to localised lockdowns and restrictions, as the reason for the downward revision in the growth forecast. Despite this, India continues to be the fastest-growing major economy in the world, with the latest World Economic Outlook figures projecting a growth rate of 5.9% in 2023.
The IMF also revised its forecast for India's retail inflation, predicting it will be 4.9% for the fiscal year 2023-24 and 4.4% for the fiscal year 2024-25. The IMF has also lowered its growth projections for the global economy due to the resurgence of Covid-19 pandemic.
According to the Global Financial Stability Report, published earlier, financial conditions across the world are fluctuating with the shifts in sentiment. Debt levels remain high, limiting the ability of fiscal policymakers to respond to new challenges. Commodity prices that rose sharply following Russia's invasion of Ukraine have moderated, but the war continues, and geopolitical tensions are high. Infectious Covid-19 strains caused widespread outbreaks last year, but economies that were hit hard — most notably China — appear to be recovering, easing supply-chain disruptions.
Despite the fillips from lower food and energy prices and improved supply-chain functioning, risks are firmly to the downside with the increased uncertainty from the recent financial sector turmoil. The baseline forecast, which assumes that the recent financial sector stresses are contained, is for growth to fall from 3.4 per cent in 2022 to 2.8 per cent in 2023, before rising slowly and settling at 3.0 per cent five years out –– the lowest medium-term forecast in decades.
Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 per cent in 2022 to 1.3 per cent in 2023. In a plausible alternative scenario with further financial sector stress, global growth will decline to about 2.5 per cent in 2023 –– the weakest growth since the global downturn of 2001, barring the initial Covid-19 crisis in 2020 and during the global financial crisis in 2009 –– with advanced economy growth falling below 1 per cent.
The IMF said the anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation. Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply.
Policymakers have a narrow path to walk to improve prospects and minimise risks. Central banks need to remain steady with their tighter anti-inflation stance but also be ready to adjust and use their full set of policy instruments, including addressing financial stability concerns, as developments demand. Fiscal policymakers should buttress monetary and financial policymakers' actions in getting inflation back to target while maintaining financial stability.
In a severe downside scenario, financial sector stress could amplify, and contagion could take hold, weakening the real economy through a sharp deterioration in financing conditions and compelling central banks to reconsider their policy paths. Pockets of sovereign debt distress could spread and become more systemic. The war in Ukraine could intensify and lead to more food and energy price spikes, pushing inflation up. Core inflation could turn out more persistent than anticipated, requiring even more monetary tightening to tame.
Fragmentation into geopolitical blocs has the scope to generate large output losses, including through its effects on foreign direct investment. Governments should aim for an overall tight stance while providing targeted support to
