IMF says Indian slowdown a drag on global economy

The International Monetary Fund (IMF) slashed its 2020 global growth forecast due to the slowdown in India and other emerging markets.

The sharp drop for India “accounts for the lion’s share of the downward revisions,” the IMF said.

The Washington-based lender has lowered the growth estimate for India to 4.8% for 2019. India-born IMF Chief Economist Gita Gopinath said growth in India slowed sharply owing to stress in the shadow banking sector and weak rural income growth, the Press Trust of India reported.

Gopinath also said a pickup in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for stressed economies like Argentina, Iran and Turkey and for underperforming emerging and developing economies such as Brazil, India and Mexico.

India saw a sharp, 1.2 percentage point cut to its 2020 growth forecast to 5.8%, the IMF’s biggest markdown for any emerging market, because of the domestic credit crunch.

Monetary and fiscal stimulus is expected to lift India’s growth rate back to 6.5% in 2021, although this is still 0.9 percentage points lower than forecast in October.

“The growth markdown largely reflects a downward revision to India’s projection, where domestic demand has slowed more sharply than expected amid stress in non-bank financial sector and a decline in credit growth,” said the World Economic Outlook report.

Earlier this month, India’s National Statistical Office projected that the country’s gross domestic product growth will fall to an 11-year low of 5% in the current fiscal, mainly due to a poor showing by the manufacturing and construction sectors.

The Reserve Bank of India also lowered its forecast for economic growth to 5% while announcing its bi-monthly monetary policy in December.

As for the world economy, the IMF said global growth would reach 3.3% in 2020, compared with 2.9% in 2019, which was the slowest pace since the financial crisis a decade ago. Estimates for both years were cut by 0.1 percentage points from forecasts made in October.

Growth will improve slightly to 3.4% in 2021, but that estimate, too, was cut by 0.2 percentage points from October.

The reductions reflect the IMF’s reassessment of economic prospects for a number of major emerging markets, notably India, where domestic demand has slowed more sharply than expected. Some other emerging markets saw forecast downgrades.

Mexico will grow only 1.0% in 2020, down from the 1.3% forecast in October, and Chile, which has been hit by social unrest, has also been downgraded.

The global lender, however, expressed some optimism about China, in the backdrop of the easing of its trade tensions with the United States, and predicted its economy would grow 6% in 2020. In October, it had forecast 5.8% growth and the upward revision follows the easing of trade tensions.

But the IMF did not give a boost to its US growth forecast, despite China pledging to increase purchases of US goods and services by US$200 billion over two years.

It said 2020 US growth would be 0.1 percentage points lower than forecast in October, at 2%, because of the fading stimulus effects from 2017 tax cuts and the Federal Reserve’s monetary easing.

Eurozone growth also was marked down 0.1 percentage point from October, to 1.3% for 2020, largely due to a manufacturing contraction in Germany and a fall in domestic demand in Spain. The fund hoped that Britain will execute an orderly exit from the European Union at the end of January.

The lender also expressed concern over rising geopolitical tensions, notably between the US and Iran, which could disrupt oil supply and weaken business investment.