The International Monetary Fund (IMF) expects India’s real GDP growth to moderate to 6.8% and 6.1% in FY23 and FY24 respectively. The IMF executive board in its Article IV consultation with India—an annual exercise that the agency holds with all member countries—acknowledged the government’s response to post-pandemic shocks, but highlighted public debt sustainability risks. The Indian government differs from the IMF’s position on the sustainability of its debt.
The agency encouraged a more ambitious and well-communicated medium-term fiscal consolidation, anchored on stronger revenue mobilisation and further improvement in expenditure efficiency, while high-quality spending on infrastructure, education and health is protected.
The current account deficit is expected to increase to 3.5% of GDP in FY23 as a result of both higher commodity prices and strengthening import demand.
IMF also observed that further improvements in public financial management, fiscal institutions and transparency would support consolidation efforts.
“The additional support to vulnerable groups this year is warranted but, with fiscal space at risk, policies should focus on a credible and clearly communicated consolidation, anchored on stronger revenue mobilization and spending efficiency. Further improvements in public financial management, fiscal institutions and transparency would help,” the IMF said.
IMF on India’s growth outlook
The agency warned that uncertainty around the outlook is high, with risks tilted to the downside. A sharp global growth slowdown in the near term would affect India through trade and financial channels. Intensifying spillovers from the war in Ukraine can cause disruptions in the global food and energy markets, with significant impact on India. Over the medium term, reduced international cooperation can further disrupt trade and increase financial markets volatility.
Domestically, rising inflation can further dampen domestic demand and impact vulnerable groups. Reflecting broad-based price pressures, inflation is projected at 6.9 percent in FY2022/2023 and is expected to moderate only gradually over the next year.
“On the upside, however, successful implementation of wide-ranging reforms or greater than expected dividends from the remarkable advances in digitalization could increase India’s medium-term growth potential,” it added.
IMF also noted that additional monetary policy tightening should be carefully calibrated and clearly communicated to balance inflationary objectives and impact on economic activity. Noting that India’s external position was broadly in equilibrium, the agency said that the exchange rate should continue to act as a shock absorber with foreign exchange intervention limited to addressing disorderly market conditions. Directors welcomed the authorities’ plans to introduce a central bank digital currency.
While noting the improvement in corporate and financial sector balance sheets, IMF encouraged additional measures to counter risks stemming from tightening financial conditions. They observed that banks should be encouraged to build additional capital buffers and recognize problem loans and noted that targeted prudential tools could strengthen the banking system’s resilience to rising interest rate risks.
