IMF projects 7.3% GDP for India: Amid the China-beating growth talk, are we missing the crisis signals?

India will remain largely unscathed from the self-inflicted shock of demonetisation and the impact of Goods and Services Tax (GST) rollout this year and next year could be even better, said IMF in its latest World Economic Growth outlook, pegging a growth rate of 7.3 percent for the country in the current year and 7.4 percent in 2019. In 2017, India had recorded a GDP growth of 6.7 percent. The International Monetary Fund (IMF) growth projections have been lowered marginally compared to what it was in its earlier forecast in April in the backdrop of rising crude oil prices and adverse global financial conditions. As soon as the numbers came out, news headlines began celebrating India’s China-beating growth forecast in the backdrop of the latter’s lower growth projections by a few basis points. [caption id=“attachment_4368147” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] As this writer has pointed out in the past, it is foolish to compare India with China and boast about the world-beating growth rates when the fruits of economic growth is not reaching the common man in India’s villages. China is altogether a different story and a much larger economy than India. The IMF has a word of praise for India and the Narendra Modi government for undertaking a slew of structural reforms, namely GST, the inflation-targeting framework, the Insolvency and Bankruptcy Code (IBC), and steps to liberalise foreign investment and make it easier to do business. Beyond this, the Fund has also spelt out what India needs to do ahead–crucial land and labour reforms to lift the economy to the next level of growth. These are usual suspects in the IMF’s to-do list for India for a long time. Overall, the IMF outlook for India is largely unchanged from the last outlook, with some minor cuts in projections. Pessimistic consumer What do the consumers in India think about the growth prospects of the economy? The Reserve Bank of India’s (RBI)  latest consumer confidence survey, an important indicator that often comes handy to analyse economic momentum, tells us that all isn’t well on the growth-front. Why is this survey important? Because, household spending plays a decisive role in an economy like India, which is driven by consumption. The September round of this survey  tells us that there is a drop in consumer confidence in economic prospects. The Consumer Confidence Index slipped to 94.8 points, down from 98.3 in the June survey even though one-year-ahead expectations rose to 121.1 points from 119.8 points in the June 2018 round. Perceptions on the current general economic situation dropped as compared with the preceding round and remained in the pessimistic zone with participants turning pessimistic on the job situation, spending and general economic situation. If consumer spending doesn’t pick up soon enough, it is not going to help the economic recovery, as expected. Rupee scare The pessimism towards the economy is not hard to understand when one looks at the nosediving rupee and the high crude oil prices. The rupee depreciation and market volatility (at the time of writing this, the rupee is once again trading at record low levels) is indeed having its ripple effects in equity and bond markets. This could remain a larger threat to the economy if the rupee continues its free fall.

The signals from the central bank (in the recent policy review) indicates that the currency may not have an easy recovery, at least not so soon. The liquidity crisis, triggered by IL&FS episode, will prompt large investors to rethink their investment priorities in India. The economic slowdown has already shown its impact in the job market and lower consumer spend.

Going ahead, it will be crucial how soon India can set its financial system in order, finish the deeper surgery on the books of state-run banks to clean up all the hidden bad loans and speed up the disinvestment process. A lot will depend on how crude oil prices behave. If crude inches up further, there will be no turning back for rupee from the 74-75 levels and that can set the stage for a prolonged period of higher deficits and financial markets volatility. Remember, India imports nearly 80 percent of its domestic oil demand and that is also one of our biggest economic vulnerabilities. Secondly, much of the bull run in equity and bond markets have been funded by foreigners who won’t hesitate to run back with their money to parent markets if US interest rates picks up and the world is threatened by another round of liquidity crisis. It wouldn’t be an exaggeration to say that India may be very well on the doorstep of another round of a major economic shock. Certainly, what is happening in the Indian financial markets can’t be blamed solely on just the IL&FS. That was only a symptom of a larger malaise. It is time for Asia’s third-largest economy to set its financial system in order and ring-fence the markets to the extent possible to avert the onslaught of a major economic crisis. (Data support from Kishor Kadam)