IMF revises India growth forecast, sees GDP shrinking at sharper 8% in FY21

Expected economic growth of 11.5 percent next year, which could slightly correct the fiscal mathematics of the government
The IMF had earlier expected India's economy to decline by 10.3 per cent in FY21.

In India's economy, the International Monetary Fund (IMF) has pegged a contraction of eight per cent in the current financial year, above the 7.7 per cent projected by the official advance estimates. In the next financial year, however, growth was expected to rise to 11.5 per cent before slowing down to 6.8 per cent, helping the economy regain its tag of the world's fastest-growing large economy in both years.

In the World Economic Outlook released on Tuesday, the IMF said India's GDP figures for the second quarter were surprising on the upside. In the quarter, India's economy fell by 7.5 per cent, while most experts had expected it to be in double digits. The growth figures for Australia, the Euro Area, Japan, South Korea, New Zealand, Turkey and the United States for the same quarter also surprised the Fund on the upside. 

In FY21, the IMF had previously expected India's economy to decline by 10.3 per cent. However, the second-quarter figure helped it revise the number. The IMF had also forecast that in FY22 the economy would grow by 8.8 per cent, but now it has revised it by 2.7 percentage points.

The growth figures for the next financial year are relevant to the budget, which will be tabled in less than a week in Parliament. At current prices, the budget assumes economic growth, which has an inflation component in it. If the economy is also projected to grow by 11.5 per cent and assumes an inflation rate of 3.5 per cent (called a deflator in the GDP methodology) as projected by the 20120-21 advance estimates, GDP growth would be 15 per cent for the next financial year. Then all the important calculations would be calculated based on that number, such as tax collections, fiscal deficit, revenue deficit. A 15 per cent growth would mean robust tax collections, though fiscal deficit remains high as the government might go for high capex to revive the economy. Health outlay may also add to the expenditure side.

The IMF has projected Spain, the United Kingdom, Italy and France to witness a sharper economic contraction than India. The global growth contraction for 2020 was projected by the IMF to be 3.5 per cent, 0.9 percentage point lower than projected in the previous forecast, reflecting stronger than expected momentum in the second half of 2020.

It stated that although recent vaccine approvals raised hopes of a turnaround in the pandemic later this calendar year, the outlook is concerned about renewed waves and new variants of the virus. The global economy is projected to grow 5.5 per cent in 2021 and 4.2 per cent in 2022 amid exceptional uncertainty. The 2021 forecast is revised up 0.3 percentage point relative to the previous forecast, reflecting expectations of a vaccine-powered strengthening of activity later in the year and additional policy support in a few large economies.

"The projected growth recovery this year follows a severe collapse in 2020 that has had acute adverse impacts on women, youth, the poor, the informally employed, and those who work in contact-intensive sectors," it said.

The projection for the global growth could be raised if further favourable news on vaccine manufacture (including on those under development in emerging market economies), distribution, and effectiveness of therapies could increase expectations of a faster end to the pandemic than assumed in the baseline, boosting confidence among firms and households 

On the downside, if the virus surge (including from new variants) proves difficult to contain, infections and deaths mount quickly before vaccines are widely available, and voluntary distancing or lockdowns prove stronger than anticipated, growth could turn out to be weaker than projected now.