IMF says India must do this to boost GDP growth potential

A crisis in India’s shadow banking sector and the Covid pandemic contributed to the downward revision of its five-year GDP growth potential – from 7 per cent to 6.2 per cent – the International Monetary Fund’s country head, Nada Choueiri, told Bloomberg Wednesday. Choueiri indicated rapid growth is possible ‘if there are reforms in the financial sector to get credit going strongly again, and labor market reforms to support greater labor force participation and employment’. Both are ‘important inputs’, Choueiri said.Essentially, India must create more jobs and credit to help the economy achieve a growth potential affected by Covid and also a stuttering financial sector.Earlier this week the IMF lowered its FY23 growth forecast for India to 8.2 per cent; the 0.8 percentage point cut reflected risks to demand from a sharp rise in prices and supply chain disruptions. More worryingly, perhaps, it sees the pace slowing to 6.9 per cent next year.This comes on the back of rising inflation that has seen prices of essential goods – vegetables, fuel and cooking gas – skyrocket. Last week data revealed retail inflation quickened to 6.95 per cent in March against 6.07 per cent in February.READ: IMF urges India to recognise food security, says ‘households in pain’It also comes against the backdrop of consequences of Russia’s Ukraine invasion, which Paolo Mauro, the deputy director of the IMF’s Fiscal Affairs Department, called ‘quite severe’.However, in a meeting with finance minister Nirmala Sitharaman, IMF chief a Georgieva praised India, noting that even with the revision the high growth was good for both the country and the world.READ: India’s high growth rate ‘positive news’ for world: IMFGlobal projections are at 3.6 per cent in 2022, down from 6.1 per cent in 2021.Revisions notwithstanding, there is still cause for optimism for India. ‘We lost two years of growth’ because of the pandemic, Choueiri said in a separate interview Friday with Bloomberg Television’s Kathleen Hays. “There is still catch up growth happening in India.”That said, surging inflation could drag. The IMF sees consumer price increases averaging 6.1 per cent in 2022; the Reserve Bank’s projection is 5.7 per cent.Price pressures driven by a global supply squeeze and a surge in energy costs are hurting consumption that accounts for nearly 60% of India’s GDP. And inflation from the supply shock driven by the war could trigger second-round effects on prices, Choueiri told Bloomberg.However, the RBI has recognised the dangers by adopting a less accommodative stance in the April policy, she said, while also advocating fiscal policies over monetary to deal with the first round effect on prices from supply shocks.With input from Bloomberg

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