IMF cuts India’s FY23 GDP estimates by 80 bps to 7.4%

In its latest update to the World Economic Outlook (WEO), the International Monetary Fund (IMF) has cut the GDP estimates for most countries across the board due to the prolonged supply chain constraints created by Russia and China. For FY23, IMF has downsized India’s GDP growth projection by 80 basis points from 8.2% to 7.4%. Similarly, IMF has also downgraded India’s growth forecast for FY24 also by 80 basis points from 6.9% to 6.1%.

However, despite these downgrades, India remains the fastest growing large economy.

The reasons for downsizing the India growth story are fairly straightforward and are both internal and external. Domestically, India is wracked by high inflation while globally there is the risk of Fed tightening, Russia imposed supply constraints and the likely impact of the persistent shutdowns in China. It may be recollected that Russia's invasion of Ukraine in late February 2022 had disrupted supplies of crucial commodities and that situation is far from stable. In fact, commodity prices continue to be the flaring point in global equations.

It is a sort of vicious cycle. Due to rampant inflation, most central banks including the US Fed, ECB, BOE and the RBI have been constrained to adopt an ultra-hawkish approach. That is the only credible way to cut down on inflation. However, this has exerted further pressure on the Indian rupee, which is close to 80/$ and near record lows. However, the US yield curve is inverting and that is perhaps the first indication that the series of rate hikes could actually translate into a recession in the US economy and spread to other countries too.

For the IMF, the significant growth downgrades were that of India, China and the US. All the three economies have seen a sharp downgrade in growth by the IMF. This has also forced the IMF to downsize the overall growth of the world economy also by 40 basis points to 3.2% in 2022 and by 70 basis points to 2.9% in 2023. After all, between the US, China and India, they contribute a substantial chunk to the incremental global GDP, both in terms of the rate of growth and the value of incremental GDP created.

The latest projection buy IMF for India GDP growth for FY22 at 7.4% is just 20 bps above the RBI estimate of 7.2%. However, most economists do believe that there was still a strong possibility of the overall growth rate for FY23 being further cut to 7% in the Indian context. There are more pessimistic estimates too like Nomura pegging India’s growth at just about 4.7%, but as we have seen in the past, India does have the uncanny ability to surprise on growth in the positive direction. For now, it is hoping that India can do it again.