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Why the IMF cut India's economic growth projections

Last updated on: January 25, 2012 11:31 IST

Why the IMF cut India's economic growth projections

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BS Reporter in New Delhi

Even as the Reserve Bank cut banks' cash reserve ratio by half a per cent but kept policy rates unchanged, the International Monetary Fund (IMF) on Tuesday suggested India be cautious on monetary and fiscal easing because of high levels of inflation and public debt.

The IMF also cut its economic growth projection for this country to 7.4 per cent in calendar year 2011 from the earlier 7.8 per cent and by 0.5 per cent to seven per cent for calendar 2012.

In its latest World Economic Outlook, it said it expected weaker global economic growth in both calendar 2011 and 2012 due to expectations of the euro area economy going into mild recession this year.

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Why the IMF cut India's economic growth projections

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Recession is generally taken as two consecutive quarters of negative GDP growth. The IMF expects euro area GDP to contract 0.5 per cent in 2012. "Those (economies) that suffer from both relatively high inflation and public debt (including India and various economies in the Middle East) may need to take a more cautious stance (than other emerging market economies ) on any policy easing," the IMF said.

On any fiscal easing in India, the IMF said in a separate report that the cyclically adjusted deficit was projected to fall by about 0.5 per cent of GDP this year.

"However, the space for loosening fiscal policy in response to a growth slowdown is limited by still high deficits and debt," it warned.

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Photographs: Soo Hoo Zheyang/Reuters
Tags: IMF , GDP , India , Middle East

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Why the IMF cut India's economic growth projections

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It suggested that in case of a substantial fall in output, any prospective expansion should be small and focused on high-multiplier items such as indirect taxes and backlogged capital projects, rather than additional subsidies.

Wholesale price-based inflation in India came below nine per cent for the first time in a year to 7.47 per cent in December, on the back of falling food prices.

While food articles saw deflation for three weeks in a row till the first week of January, manufactured inflation was still elevated at 7.41 per cent in December, despite moderation from 7.7 per cent in November.

The latest data shows government liabilities in India, both Centre and states, rose a little over 12 per cent to Rs 56.09 lakh crore in 2010-11 from Rs 50.05 lakh crore a year before. The liabilities, both external and internal, were 71.2 per cent of India's GDP in 2010-11.

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Photographs: Amit Dave/Reuters
Tags: India , IMF , GDP

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Why the IMF cut India's economic growth projections

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IMF's caution on monetary and fiscal easing isn't for all emerging market economies. For China, where inflation is under control and public debt is not high, it suggested additional social spending to support poorer households in the face of weakening external demand.

Economies with diminishing inflation pressure and fiscal fundamentals, including many in Latin America, could afford to stop tightening or to ease monetary policy, IMF suggested. With a rider that these nations ensure that overheating sectors such as real estate are managed through macro prudential measures.

Even as RBI expected economic growth to be faster in 2012-13 than in 2011-12, pegged by it at seven per cent, the IMF projected economic growth in India to be lower in the next two calendar years.

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Why the IMF cut India's economic growth projections

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While 2012 is projected to witness seven per cent growth, economic expansion is estimated to be 7.3 per cent in 2013. In September, IMF had projected India's economic growth rate to be 7.5 per cent in 2012.

It should be noted that IMF estimates economic growth in terms of market prices, which include indirect taxes, and on a purchasing power parity basis, against the official methodology in India of calculating GDP numbers at factor cost, exclusive of indirect taxes.

On the global front, IMF said economic recovery was threatened by intensifying strains in the euro area and fragilities elsewhere.

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Tags: IMF , India , GDP

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Why the IMF cut India's economic growth projections

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"Financial conditions have deteriorated, growth prospects have dimmed and downside risks have escalated," it said, while scaling down world economic growth by 0.2 percentage points to 3.8 per cent in 2011, from the earlier four per cent projections.

Similarly, global GDP growth was cut by 0.7 percentage points to 3.3 per cent for this calendar year from the four per cent projected earlier. In 2013, world economic growth is projected to rise to 3.9 per cent.

The IMF projections came on the heels of the World Bank saying it expected the Indian economy to grow by just 6.8 per cent in 2011-12, significantly lower than the 7.25-7.75 per cent pegged by the finance ministry, as the economy faces high interest rates and there was "heightened uncertainty of policy reforms".

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Why the IMF cut India's economic growth projections

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The Bank also cut its forecast for global economic growth rate to 2.5 per cent for calendar year 2012 from its earlier estimates of 3.7 per cent. It also cautioned against the persisting threat of a global financial shock, "similar in magnitude to the Lehman crisis".

On the issue of whether a European crisis would spell doom for payment obligations of Indian companies, the IMF in its separate 'Global Financial Stability Report' said euro area banks provide roughly 30 per cent of trade and project finance in the Asian region, though their balance sheets account for only about five per cent of bank assets.

"The impact depends on the extent to which local banks can step in and fill the financing gap. Though some banks may have the balance sheet capacity to do so, there are significant operational challenges in some areas of trade finance," the report said.



Tags: IMF , Bank , European , India , Lehman

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