The IMF on Tuesday followed the World Bank in reducing its forecast for India’s economic growth in the current financial year. While the IMF cut its July projection for real GDP growth by a substantial 0.9 percentage point to 6.1%, the bank slashed the estimate by as much as 1.5 percentage points to 6%. These magnitudes of reduction underscore the severity of the ongoing slowdown and affirm the welter of grim data and predictions from other forecasters, both global and domestic. Interestingly, by the bank’s own admission, its forecast is more optimistic than the average estimate of 32 Indian respondents who were polled as part of its South Asian Economic Policy Network Survey: these economists expect growth to be 5.7% this fiscal. The only significant issue of debate is over the cause of the malaise, with the World Bank largely echoing what the Centre’s economic mandarins have been saying — that this is a cyclical slowdown, exacerbated by global influences. A view, however, that neither the Indian experts surveyed, nor Moody’s Investors Service, broadly concur with. While Moody’s pared its projection to 5.8%, ascribing the downturn partly to “long-lasting factors”, only 10% of the respondents in the network survey considered it a “purely cyclical” development and as many as 25% saw structural factors as being solely responsible. The importance of an accurate diagnosis cannot be overemphasised since policy interventions to address the malady must be targeted appropriately to ensure enduring outcomes.
Crucially, the bank and the fund have flagged one area of structural weakness that could undermine any recovery if left unaddressed. Asserting that the weak financial sector is becoming a drag on momentum, with the country’s banks yet to regain vigour from the depressing burden of bad loans, the World Bank warned that non-banking financial companies’ significant share in total credit and their linkages with banks “pose broad-based contagion risks”. Financial sector reforms, the bank suggests, would not only help resolve the sectoral infirmities but would also help put India back on a rapid growth path. The World Bank has also highlighted another key concern. Observing that a sharper-than-expected slowdown in major economies such as the U.S. and Eurozone could have severe spillover impacts , the bank noted that India was vulnerable to being affected immediately and over a longer duration by real GDP shocks in these advanced economies. In the case of a Chinese GDP shock, the onset of the impact on India would likely be delayed but substantially more pronounced. And while the IMF has urged structural reforms in labour and land laws to boost job and infrastructure creation, everyone agrees that becalmed domestic consumption demand is the biggest drag on momentum. It may, therefore, make a lot of sense to heed Nobel laureate Abhijit Banerjee’s prescription and put more money in the hands of consumers, especially those in the rural hinterland, to reinvigorate demand.