Strong setback - India growth forecast cut sharply by IMF for FY22

IMF's World Economic Outlook (WEO) report July '21 had ominous signals for Indian economy's 2021 performance.

 Strong setback - India growth forecast cut sharply by IMF for FY22

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• The story: While it was indeed expected since the second pandemic wave set in, but officially now, the International Monetary Fund (IMF) has slashed India’s growth forecast for FY22 to 9.5%, from previous projection of 12.5%. Key reason is the severe second Covid-19 wave during March-May '21.
• World marches on: The global growth forecast remained unchanged at 6% for the calendar 2021. Upgrades in the developed world were offset by downgrades in several countries that experienced renewed waves, most notably India.

1. Growth prospects in India were downgraded following the severe second COVID wave during March–May and expected slow recovery in confidence from that setback. This was mentioned in the IMF's latest edition of World Economic Outlook (WEO). The IMF had raised India’s FY22 growth forecast to 12.5% in April from 11.5% projected in January, as the recovery gained strength before the second wave. It all reversed soon.
2. But the forecast for India for FY23 was raised to 8.5%, an upgrade of 1.6 percentage points.
3. The report said that the world was divided into two camps, due to different performance on vaccination front. Those having access were likely to see further normalisation of activity while others faced resurgent infections and deaths.
4. The advanced economies, with high vaccination rates, were likely to grow 5.6% in 2021, a half a percentage point increase from April forecast. The US growth is now seen at 7% compared with 6.4% earlier.
5. China’s growth forecast has been cut by 0.3% to 8.1%.

• Vaccination the key: In countries with high vaccination coverage, such as the UK and Canada, the impact would be mild; and those lagging in vaccination, such as India and Indonesia, would suffer the most. IMF warned that risks remained for everyone as long as the virus remained in circulation. Steady recovery is not assured anywhere so long as segments of the population remain susceptible to the virus and its mutations.
• Rising price pressures: The IMF warned on recent price pressures, reflecting unusual pandemic-related developments and transitory supply-demand, but said it was expected to return to its pre-pandemic ranges in most countries in 2022. High inflation was a key concern for global financial markets, as it could force central banks to tighten monetary policy. That can set off a chain reaction of financial events. The IMF urged central banks to generally "look through" transitory inflation pressures and avoid tightening until there was more clarity on the underlying price dynamics.

1. IMF said that clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions.
2. It aso said there was a risk of these transitory pressures becoming more persistent and central banks may need to take pre-emptive action.
3. Commodity prices were expected to increase at a significantly faster pace than assumed in the April 2021 WEO. Amid the strengthening global recovery, oil prices are expected to rise close to 60% above their low base in 2020.

• Summary: Clearly, the year 2021 has turned very challenging for India now. The pace of vaccination is quite slow as on date. India's 7% population vaccination rate is half of global average of 14%, while Brazil, US ad UK are at 18%, 50% and 55% resp. Things have changed dramatically for India, since Jan 2021, and as the govt. is in no mood to give a fiscal stimulus package, the only way out is to push vaccination harder. That is not happening as of now, and the price India will pay will be steep (if not done).

 

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