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IMF raises India’s growth forecast to 9% for FY23; global growth seen lower at 4.4% this year

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IMF has pegged India’s FY22 real GDP growth at 9 percent, 0.5 percentage points lower than its previous forecast of 9.5 percent released in October 2021.

The International Monetary Fund (IMF) has raised the growth forecast for India for the next two fiscals but lowered the growth estimate for the current fiscal on the back of the emergence of the Omicron variant in its latest World Economic Outlook (WEO) Report published on Tuesday.
IMF has now pegged India’s FY22 real GDP growth at 9 percent, 0.5 percentage points lower than its previous forecast of 9.5 percent released in October 2021.
However, India’s growth prospects for FY23 and FY24 have been marked up “on expected improvements to credit growth—and, subsequently, investment and consumption—building on the better-than-anticipated performance of the financial sector,” the fund said.
India is seen growing by 9 percent in FY23 now, compared to the earlier forecast of 8.5 percent, and by 7.1 percent in FY24 which is also 0.5 percentage points higher than the previous forecast. India's growth projections are 8.7 percent for the calendar year 2022 and 6.6 percent for the calendar year 2023, IMF said.
The upward revision for India is among the most prominent revisions, not due to the pandemic, made by the IMF in its latest WEO Report for January 2022, the fund noted.
On the global front, IMF said that the world economy is entering 2022 in a weaker position than earlier anticipated. “News of the Omicron variant led to increased mobility restrictions and financial market volatility at the end of 2021. Supply disruptions have continued to weigh on activity. Meanwhile, inflation has been higher and more broad-based than anticipated, particularly in the United States. Adding to these pressures, the retrenchment in China’s real estate sector appears to be more drawn out and the recovery in private consumption
is weaker than previously expected,” IMF said in its report.
Global growth is estimated at 5.9 percent in 2021 and is expected to moderate to 4.4 percent in
2022, half a percentage point lower than in October 2021. This baseline projection incorporates anticipated effects of mobility restrictions, border closures, and health impacts from the spread of the Omicron variant of COVID-19.
“The continuing global recovery faces multiple challenges as the pandemic enters its third year. The rapid spread of the Omicron variant has led to renewed mobility restrictions in many countries and increased labor shortages. Supply disruptions still weigh on activity and are contributing to higher inflation, adding to pressures from strong demand and elevated food and energy prices. Moreover, record debt and rising inflation constrain the ability of many countries to address renewed disruptions,” noted Gita Gopinath, IMF’s outgoing chief economist.
The IMF’s latest World Economic Outlook anticipates that while Omicron will weigh on activity in the first quarter of 2022, this effect will fade starting in the second quarter.
“We project global growth this year at 4.4 percent, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China. In the case of the United States, this reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation, and continued supply disruptions. China’s downgrade reflects continued retrenchment of the real estate sector and a weaker-than-expected recovery in private consumption. Supply disruptions have led to mark downs for other countries too, such as Germany,” Gopinath said.
IMF expects global growth to slow to 3.8 percent in 2023. This is 0.2 percentage points higher than in the October 2021 WEO and largely reflects a pickup after current drags on growth dissipate. “The upward revision to global growth in 2023 is mostly mechanical. Eventually, the shocks dragging 2022 growth will dissipate and— as a result—global output in 2023 will grow a little faster,” IMF said in its report.
The forecast is conditional on adverse health outcomes declining to low levels in most countries by end 2022, assuming vaccination rates improve worldwide and therapies become more effective.
Even as recoveries continue, the troubling divergence in prospects across countries persists, IMF said. “While advanced economies are projected to return to pre-pandemic trend this year, several emerging markets and developing economies are projected to have sizeable output losses into the medium-term,” Gopinath noted.
Advanced economies are estimated to grow by 3.9 percent in 2022, and by 2.6 percent in 2023, whereas emerging and developing market economies are expected to grow by 4.8 percent in 2022 and 4.7 percent in 2023.
Global inflation is expected to remain elevated in the near term, averaging 3.9 percent in advanced economies and 5.9 percent in emerging market and developing economies in 2022, before subsiding in 2023.
Assuming medium-term inflation expectations remain well anchored and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens, and demand rebalances away from goods-intensive consumption towards services. The rapid increase in fuel prices is also expected to moderate during 2022–23, which will help contain headline inflation, the report said.
It also said that global trade is expected to moderate in 2022 and 2023, in line with the overall pace of expansion. Assuming that the pandemic eases over 2022, supply chain problems are expected to abate later in the year.
The balance of risks to these growth projections remains tilted to the downside, IMF said.
The emergence of new COVID variants, supply chain disruptions, uncertainty around inflation, risks to financial stability with rate hikes in advanced economies are also concerns.
“As the monetary policy stance tightens more broadly this year, economies will need to adapt to a global environment of higher interest rates. Emerging market and developing economies with large foreign currency borrowing and external financing needs should prepare for possible turbulence in financial markets by extending debt maturities as feasible and containing currency mismatches. Exchange rate flexibility can help with needed macroeconomic adjustment. In some cases, foreign exchange intervention and temporary capital flow management measures may be needed to provide monetary policy with the space to focus on domestic conditions,” Gopinath said.
To address many of the difficulties facing the world economy, it is vital to break the hold of the pandemic, the fund said. This will require a global effort to ensure widespread vaccination, testing, and access to therapeutics, including the newly developed anti-viral medications, Gopinath added.
Gita Gopinath said that effective monetary policy communication is key at the current juncture. “At the national level, policies should remain tailored to country specific circumstances including the extent of recovery, of underlying inflationary pressures, and available policy space. Both fiscal and monetary policies will need to work in tandem to achieve economic goals. Given the high level of uncertainty, policies must also remain agile and adapt to incoming economic data,” she said.
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