The International Monetary Fund (IMF) has projected India's GDP growth at 6.8 percent for the ongoing fiscal year, and has warned of debt sustainability risks. The IMF's executive board has concluded the 2022 Article IV consultation with India. The IMF conducts bilateral discussions with members almost every year under Article IV of its Articles of Agreement.
India's debt-to-GDP ratio peaked at 89 percent in FY21 and was at 83.4 percent in FY22. The IMF said India's debt is expected to remain around the mentioned level, before gradually declining from FY26 onwards.
The IMF said "despite mitigating factors, debt sustainability risks have increased due to higher effective interest rates combined with high gross financing needs and slowing growth." It added that the structure of India’s debt is a mitigating factor for sustainability risks.
Projections
According to the consultation, India's growth is expected to moderate, reflecting the less favourable outlook and tighter financial conditions, the IMF said in a statement. India's GDP is projected to grow at 6.1 percent in the next fiscal year.
(Current account balance: % of GDP)Meanwhile, the IMF has projected India's inflation for the present financial year at 6.9 percent. It will moderate only gradually over the next year to 5.1 percent, it said. India's current account deficit (CAD) is expected to rise to 3.5 percent of the GDP this fiscal with higher commodity prices, strengthening import demand.
The central government's fiscal defici,t targeted in the Union Budget, is within reach and a stronger tightening in the general government fiscal stance is expected for FY24, the IMF said.
Uncertainty around the outlook is high, with risks tilted to the downside. A sharp global growth slowdown in the near term would affect the country via trade and financial channels, the IMF said.
The intensifying spillovers as a result of the Russia-Ukraine war can cause disruptions in the global food and energy markets, and could have a significant impact on India.
Domestically, the rising inflation could further dampen the domestic demand and impact vulnerable groups.
However, India's medium-term growth potential could increase with successful implementation of wide-ranging reforms. The IMF said greater than expected dividends from remarkable advances in digitisation could increase India's medium-term growth potential.
IMF's policy recommendations
The IMF has recommended that India's fiscal policy should ensure medium-term sustainability and that additional monetary tightening should be carefully calibrated and communicated.
Earlier this month, the Reserve Bank of India increased the repo rate by 35 basis points to 6.25 percent and according to the minutes of the rate-setting panel that were released on Wednesday, RBI Governor Shaktikanta Das said the central bank would continue to hike the repo rate to ward off accentuated inflationary pressures.
The IMF said exchange rates should act as the main shock absorber and that intervention should be limited to addressing disorderly market conditions.
The IMF recommended that financial sector policies should continue to facilitate the exit of non-viable firms and they should also encourage banks to build capital buffers as well as recognise problem loans.
It also said that the Indian government guarantees successfully sustained credit flow to viable MSMEs and only 2 percent of all guaranteed loans are non-performing at present. Given the strong recovery in bank credit and to contain the risk of loan evergreening, a further MSME guarantee scheme extension does not seem warranted, the IMF stated.
It added that improving productivity, strengthening governance and furthering trade liberalisation would help medium-term growth.
Also Read: IMF Chief Exclusive | 2023 may be worse than 2022 for the global economy, says Kristalina Georgieva
(Edited by : Shoma Bhattacharjee)
First Published: Dec 22, 2022 7:39 PM IST
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