IMF GDP forecast: Can we stop the India-China ‘fastest growing economy' debate?

Now, the International Monetary Fund (IMF) has cut the GDP growth forecast of India for the current fiscal year to 6.6 percent from its previous estimate of 7.6 percent citing the "temporary negative consumption shock" of demonetisation announced by Prime Minister Narendra Modi on 8 November.

This comes only days after the World Bank too slashed India's growth estimates to 7 percent from 7.6 percent early and a few other agencies too have gone on a pessimistic mode on India’s near-term growth prospects.

"In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," the IMF said in its latest World Economic Outlook (WEO) update, while upping China's GDP growth estimate for 2016-17 to 6.7 percent from the earlier 6.5 percent.

Reuters

Reuters

This has immediately given room for news headlines (read here and here ) saying why India will no longer be the world’s fastest growing economy if indeed the IMF growth projections are realised.

It’s time we stopped comparing us with China on GDP growth and worrying on who comes first. This comparison never made any sense. China’s economy is a giant compared to that of India’s. At the last count, the size of India’s economy is $2.2 trillion while that of China is $11 trillion —nearly five times bigger than us. Because of its sheer size and depth, even a 2 percent growth of Chinese economy is equal to even a 9 percent growth of India’s economy.

Even the Modi government has embarked on a damage control mode after the IMF growth forecasts came in. In a series of tweets on Tuesday, PM Modi cited reports saying India will continue to remain as one of the fastest growing economies in the world.

What the government should worry is not on losing the ‘world’s fastest growing economy’s tag but the fact that the sharp downward revision of the growth figures isn’t coming from IMF alone but a slew of other agencies and what it means for the Indian economy going ahead. Just a few days back, the World Bank too revised the growth figures downward to 7.1 percent, a projection in line with what the Reserve Bank and the CSO, the government’s statistical division, has said.

The Centre for Monitoring Indian Economy (CMIE) has gone on to predict even more pessimistic scenario. According to CMIE (read here), India’s GDP growth rate for this fiscal year will decline to 6 percent on account of the demonetisation. Further, the growth is expected to maintain the same rate for five years, the agency said.

“Before the demonetisation shock, the Indian economy was expected to gradually accelerate its real GDP growth rate from 7.5 percent to over 8 percent per annum,” Mahesh Vyas, Managing Director at CMIE wrote in the article cited above. “We now expect this growth trajectory to shift down to about 6 percent per annum for the next five years. The economy is unlikely to achieve a growth of 7 percent any time during the coming five years,” Vyas said.

The CMIE cites the scrapping of 86 percent of the currency in circulation leading to a sharp decline in private consumption expenditure, a corresponding fall in retail prices of perishable commodities, a substantive dislocation of labour and corresponding losses in wages and break-down of supply chains in many parts.

What will be the actual hit on the GDP on account of declining growth is a debatable figure. “From an estimate that I have, the growth rate in aggregate will fall over 3 percent and arrive at 4.3 percent. This means a loss of Rs 4.7 lakh crore of GDP, this will be extinguished. This is in the worst case scenario...the best case scenario is loss of Rs 3 lakh crore,” said West Bengal finance minister Amit Mitra in December. Mitra’s figures may be a bit of a stretch but the actual impact could be Rs 1.5 lakh crore to Rs 2 lakh crore, according to economists.

The question is what this sharp decline will do 1.25 billion Indians. A sharp decline in GDP growth would mean more job losses, decline in consumer’s ability to purchase and lower number of new projects coming in. Even the existing projects may get derailed resulting in large cost overrun. Compared to this loss, what will the tangible gains from the demonetisation exercise, both in the short-term and long-term is a matter of speculation.

Demonetisation induced cash crunch will throw severe challenges to the government going ahead. The immediate task for the government is resolving the cash-crunch and reviving the sectors hit by its own action. Already there are signs of distress (read here) emerging with unemployment rising and bank credit growth declining to 19-year lows. In an interview to Firstpost, former SBI chairman, Pratip Chaudhuri, cautioned about this trend.

We have bigger things to worry here other than losing the ‘fastest growing economy’ tag to China.

(Data support from Kishor Kadam)


Updated Date: Jan 17, 2017 15:51 PM

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