IMF lowers India’s growth forecast for 2012-13

Washington: The International Monetary Fund has lowered India’s economic growth forecast by 1 per cent to 5-6 per cent for 2012-13.

The IMF in its latest World Economic Outlook report said, “Growth in India is projected to average 5-6 per cent in 2012-13, more than one percentage point lower than in the April 2012 WEO (World Economic Outlook).”

“The downgrade reflects both an expectation that current drags on business sentiment and investment will persist and a weaker external environment,” the report said.

Released in Tokyo ahead of the IMF-World Bank 2012 Annual Meetings, the report said that the growth has weakened in the first half of current year due to deteriorating business sentiment and stalled investment due to governance issues.

“In India, growth weakened more than expected in the first half of 2012, an outcome of stalled investment caused by governance issues and red tape, and a deterioration in business sentiment against the backdrop of a rising current account deficit and the recent rupee depreciation,” it said.

The report presented a gloomier picture of the global economy than a few months ago, saying prospects have deteriorated further and risks increased.

The IMF’s forecast for global growth was marked down to 3.3 per cent this year and 3.6 per cent for 2013.

The multilateral agency said advanced economies are projected to grow by 1.3 per cent this year, compared with 1.6 per cent last year and 3 per cent in 2010, with public spending cutbacks and the still-weak financial system weighing on prospects.

On price rise, the report said that the Indian monetary policy should stay on hold until inflation softens. “In India, where inflation is still high, monetary policy should stay on hold until a sustained decrease in inflation materialises,” the report said.

Wholesale-price based inflation was at 7.55 per cent in August on account of rising prices of food items and manufactured goods. The price rise has restrained the Reserve Bank of India from cutting interest rates.

Growth in emerging markets and developing economies was marked down compared with forecasts in July and April to 5.3 per cent, against 6.2 per cent last year.

Emerging markets such as China, India, Russia, and Brazil will all see slower growth, the report said adding that growth in the volume of world trade is projected to slump to 3.2 per cent this year from 5.8 per cent last year and 12.6 per cent in 2010.

“Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses,” said IMF Chief Economist Olivier Blanchard.

Growth in China is projected to be over 7 per cent this year and then to strengthen to over 8 per cent in 2013 as domestic demand growth, especially investment growth, picks up with the policy easing now under way.

According to the report, compared with the region’s growth performance in recent years, the near- and medium-term outlooks are less buoyant.

“This view reflects weaker anticipated external demand resulting from the tepid growth prospects in major advanced economies and a downshift in China’s and India’s growth prospects, with a return to double-digit growth in China unlikely given the policy objectives laid out in the 12th Five-Year Plan,” it said.

The IMF said policies must strike the right balance between managing external and internal risks and orchestrating a soft landing.