Narendra Modi in Davos: IMF’s 7.4% GDP forecast is a gift to PM, but why are foreigners more optimistic about growth than CSO?

At the World Economic Forum (WEF) in Davos to hard-sell the India story, Prime Minister Narendra Modi (WEF) received a shot in the arm when the International Monetary Fund (IMF) projected 7.4 percent growth for the Indian economy in 2018. The IMF, it may be added, follows a January to December financial year. The timing of the IMF announcement couldn’t have been better for Modi, who is leading India’s largest-ever delegation to Davos to make a case for India on the global stage.

The IMF figures present an opportunity for the prime minister to defend the short-term economic slowdown back home on account of his massively disruptive twin economic moves — demonetisation and the rollout of the Goods and Services Tax (GST). Modi can now tell the Davos crowd that India is on its way to recovery and that the IMF has reaffirmed its belief in the Indian economy. The problem is with the sharp disconnect between growth projections back home and those abroad.

The Indian government’s Central Statistics Office (CSO) predicts 6.5 percent GDP growth for FY 2018. That, according to Indian rules, is the April to March period. Even if the economy picks up in the second half of the fiscal year — as it appears it will when looking at certain data points such as manufacturing pick-up and tractor sales, growth is unlikely to rise beyond seven percent this year, according to most local economists. But, foreigners appear to be more optimistic. At 7.4 percent, India will top the global GDP growth chart, beating even its illustrious neighbour China. Further, IMF sees even higher growth in 2019, at 7.8 percent.

If growth picks up significantly in the second half of the current fiscal year, India could end up close to seven percent or a few basis points above. This isn’t impossible if growth engines fire on time. The triggers should come from private and public consumption, as these are the only segments that have shown some promise of pick-up, whereas manufacturing engines have failed to deliver in a big way thus far.

But even CSO’s GDP estimates show that there is hope of revival in gross fixed capital formation, which is the indicator of overall economic activity. As cited in a previous analysis on GDP estimates, the Gross Fixed Capital Formation (GFCF) is expected to register a growth rate of 6.5 percent at current prices as compared with 2.9 percent last year and 5.8 percent the year before that. GFCF at current prices is estimated at Rs 43.84 lakh crore in 2017-18 as against Rs 41.18 lakh crore in 2016-17.

At constant (2011-12) prices, the GFCF is estimated at Rs 37.65 lakh crore in 2017-18 as against Rs 36.02 lakh crore in 2016-17. This shows there is an expected revival in overall investments. The government estimates the private final consumption expenditure (PFCE) at current prices at Rs 97.75 lakh crore in 2017-18 as against Rs 89.27 lakh crore in 2016-17. Government Final Consumption Expenditure (GFCE) at current prices is estimated at Rs 19.77 lakh crore in 2017-18 as against Rs 17.69 lakh crore in 2016-17. If the investment and consumption momentum picks up and the manufacturing sector gets the desired boost, it can take the economy back to the growth path by next year.

If this recovery indeed happens, it will augur well for the Modi government as the numbers will land just in time for crucial state polls in the second half of 2018 and ahead of the 2019 General Election. Modi can then claim that the painful phase of the economy on account of demonetisation and GST shocks is finally over and the economy is set for a bigger leap with even stronger fundamentals.

Also, according to Devendra Pant, chief economist at India Ratings, there is a likelihood of growth figures being revised upwards going ahead. “There is a general optimism about the second half. This will be possible if consumption picks up and investments revive,” said Pant. These factors and assumptions probably explain why IMF bets big on India and is even more optimistic on the India growth story than India’s own estimates.

Remember, the World Bank too had projected a higher GDP growth for India. Its 2018 Global Economics Prospect (GEP) projects India’s GDP growth to pick up to 7.3 percent in 2018-19 and to 7.5 percent for the next two years. Foreigners appear to be more optimistic about India growth story than Indians. Only time will tell whose predictions come true. For now, the IMF forecast is a gift to Modi in Davos.