The IMF’s Outdated Outlook And Our Policy Challenges

Context: While the Global Outlook Report by the International Monetary Fund (IMF) has increased the projected growth for India, in the post-pandemic era, certain structural issues act as hurdles in achieving such growth.

Positive growth projections: As per World Economic Outlook Report 2021 (WEO), India’s projections have gone up from 11.5% and 6.8% to 12.5% and 6.9% for the year 2021 and 2022, respectively.

Issues with the credibility of high growth projections:

• Statistical illusion due to base effect: High numbers, especially for India, on account of the base effect of steep fall of -8% (-7.7% estimated by India’s Central Statistical Office) in 2020-21.
• Meagre real growth: India’s average growth across three years from 2020 to 2022 remain under 4%, compared to 4.2% in 2019.
• Overlooked the resurgence of COVID: There is a huge output loss relative to pre-covid growth projections due to the overlooked risks of the resurgence of covid cases in India.
  • On account of rising COVID cases, the RBI has lowered the growth projection by two percentage points (at 10%), as compared to the WEO’s projections.
• Issues with the monetary policymaking: The RBI has to balance the conflicting objectives of upward pressure on inflation and to support a recovery from the covid-related economic crisis.
  • Raising rates at this juncture was out of the question.
  • A lowering of the repo rate, currently at 4%, was also unlikely because that level is already very low—indeed negative— relative to consumer price inflation.
  • Failure of accommodative monetary policy: Due to the burden of stimulating the economy, while the policy rates have fallen in the past, they did not stimulate credit growth. This is because its transmission channels are clogged on account of a ‘twin balance sheet problem.
    • Rising Non-Performing Assets in the banks, making them averse to lending.
    • Distressed corporate balance sheet, making them hesitant to borrow.
  • Rising capital outflows: Due to a possible strong US recovery and rising interest rates in America. This may burden the RBI to tackle the ‘impossible trinity – See Fig.

Need of the hour –

• An effective fiscal policy push: for complementing the growth and investment in the economy.
• Reduce taxes on petroleum products: as suggested by the RBI, to reduce the impact of inflation.