Why IMF's latest projection on India's economic growth must not come as a surprise

The International Monetary Fund's (IMF's) latest forecast does not have too much good news for India. Its World Economic Outlook forecasts a 4.9 percent contraction in the global economy due to the coronavirus disruption. India's growth rate in 2020 is tipped to come down from 1.9 per cent – as forecasted in IMF’s April report – to -4.5 percent.

“India’s economy is projected to contract by 4.5 percent following a longer period of lockdown and slower recovery than anticipated in April,” the outlook read.

If the projection holds true, India's economy could see a contraction for the first time since 1980.

The IMF has been projecting a below-par economic scenario for India even before the coronavirus pandemic.

In January 2020, it cut the projected growth rate for 2019 (FY20) from 6.1 per cent to 4.8 per cent, citing slowing domestic demand and a stressed non-banking financial sector. In July 2019, the IMF downgraded the growth rate for FY20 from 7.3 per cent to 7 per cent.

In January, IMF blamed the sluggish growth in India for the projected decline in the global economy in FY 20. “The sharp drop for India ‘accounts for the lion's share of the downward revisions’,” the WEO forecast read.  

The IMF has repeatedly pointed to demonetisation and glitch-ridden GST reforms as two of the many reasons for the abrupt economic slowdown in India. IMF MD Kristalina Georgieva has said, "The Indian economy witnessed an abrupt slowdown in 2019 due to turbulence in NBFCs and reforms like GST and demonetisation.”

Nevertheless, even amid the global slowdown, the IMF, until 2019, continued to peg India as the fastest growing major economy. In fact, the IMF along with the World Bank and ADB said they consider the fallouts of demonetisation and GST as short-term impacts, but with major benefits in the long run.

India’s economic position on gloomy forecasts has always been: Better than other major economy. But pandemic and the lockdown have robbed India of its cockiness.

Corona double whammy

The downturn in growth projections has come at a time when India is struggling to unlock the coronavirus lockdown. The World Bank has already projected a 3.2 per cent contraction in the Indian economy this fiscal year, while the United Nation in its World Economic Situation and Prospects (WESP) 2020 report pegged India’s growth rate at 1.9 per cent.

India is no longer the fastest growing economy. It has lost that tag to China, which is expected to grow at 1 per cent in 2020.

India faces the threat of receiving ‘junk' rating by credit rating agencies. That would mean that buying Indian debt instruments would be risky, consequently impacting India’s ability to attract foreign investment.

Two agencies – Fitch and Moody’s – already have a negative outlook on India, largely due to prolonged low growth, the fragile financial sector and ultimately the long lockdown period.

In 2019-20, the Indian economy grew by 4.2 per cent down from 6.1 per cent in 2018-19. India has endured below-par growth for seven quarters consequently – the worst streak in the post-liberalisation era. While external factors like the global economic decline have had a bearing on India, internal factors like demonetisation, faulty GST implementation, declining investments in infrastructure and poor automobile sales due to lower demand have had bigger impacts on the economy.

Demonetisation, as experts have said, impacted small and medium scale enterprises, which are the biggest job providers in India. The decline in cash flow adversely impacted the real estate sector which continues to struggle. The biggest impact of the exercise was on the unorganised sector, which is not just cash-dependent but also a job generator. GST has fared better, but the complicated tax structure and the Centre’s delays in paying state’s dues only reflect that GST’s fiscal impact is yet to fructify.  

In 2018, Amit Mitra, West Bengal finance minister and an economist, had estimated Rs 4.8 lakh crore loss to the economy due to demonetisation and GST. A May 2020 estimate by the State Bank of India pegged the total loss due to the lockdown at Rs 30 lakh crore – more than the Rs 20 lakh crore Atmanirbhar Bharat package. The Atmanirbhar Bharat initiative is being touted as the third economic reform - after note ban and GST - of the Modi government. But in the absence of a strong manufacturing base, the exodus of guest workers during the lockdown, and the looming job creation crisis, the unfolding of the initiative will be closely watched.