IMF cuts India's growth estimate to 7.4% while indicating world's three biggest economies are stalling

The International Monetary Fund (IMF) has lowered India's growth forecast by 0.8 percentage point for this financial year and the next amid unfavourable external conditions, its latest World Economic Outlook report released on Tuesday showed.

India's economy is now projected to grow by 7.4 percent in FY23, 80 basis points lower than IMF’s April projection of 8.2 percent. India’s FY24 growth forecast has also been cut by 80 basis points to 6.1 percent.

"For India, the revision reflects mainly less favourable external conditions and more rapid policy tightening," the report said.

The IMF noted in its report that the downgrades for China, the United States, and India are driving the downward revisions to global growth during 2022–23. The IMF said this reflected the materialisation of downside risks highlighted in the April 2022 World Economic Outlook.

IMF lowered the global growth outlook by 40 basis points for the current financial year and now estimates growth to slow down to 3.2 percent from last year’s 6.1 percent. It will slow down to a further 2.9 percent next financial year.

IMF said this reflected stalling growth in the world's three largest economies—the United States, China, and the Euro area—with important consequences for the global outlook. In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9 percent.

"The global economy, still reeling from the pandemic and Russia's invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialise," the IMF said.

The report said higher-than-expected inflation, especially in the US and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year.

Advanced economies’ growth forecast has been revised down by 80 basis points to 2.5 percent for 2022, and by 100 basis points to 1.4 percent for 2023. The Emerging Markets and Developing economies’ growth forecast has also been revised down by 20 basis points for 2022 to 3.6 percent, by 50 basis points for 2023 to 3.9 percent.

"Lower growth earlier this year, reduced household purchasing power, and tighter monetary policy drove a downward revision of 1.4 percentage points in the United States. In China, further lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points, with major global spillovers. And in Europe, significant downgrades reflect spillovers from the war in Ukraine and tighter monetary policy," said the report.

Global inflation has been revised up due to food and energy prices as well as lingering supply-demand imbalances, and it is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies this year—upward revisions of 0.9 and 0.8 percentage point, respectively, IMF said.

The report also noted that risks to the outlook are overwhelmingly tilted to the downside. "The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed COVID-19 outbreaks and lockdowns, as well as a further escalation of the property sector crisis, might further suppress Chinese growth; and geopolitical fragmentation could impede global trade and cooperation," it said.

"A plausible alternative scenario in which risks materialise, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, would put growth in the bottom 10 percent of outcomes since 1970," said IMF.

The report noted that inflation at current levels represents a clear risk for current and future macroeconomic stability, and bringing it back to central bank targets should be the top priority for policymakers.

The IMF said targeted fiscal support could help cushion the impact on the most vulnerable. "But with government budgets stretched by the pandemic and the need for an overall disinflationary macroeconomic policy stance, offsetting targeted support with higher taxes or lower government spending will ensure that fiscal policy does not make the job of monetary policy even harder," the report added.