IMF pegs India growth at 7.4% this year, 7.8% in the next; Asia to grow at 5.6%

The recently-released Regional Economic Outlook Update: Asia and Pacific brings good tidings for the Modi government. According to the IMF report, India's growth rebounded strongly to 7.2 per cent in the third quarter of the last fiscal, up from 6.1 per cent in the first half of 2017-18. It is projected to accelerate to 7.4 per cent in the current financial year, making India the region's fastest-growing economy followed by Bhutan and Bangladesh.

The following year growth is projected to pick up further to 7.8 per cent, and India will remain one of the region's fastest-growing economies, pipped only by Brunei Darussalam. China's growth, in comparison, is expected to moderate to 6.6 per cent this year as financial, housing, and fiscal tightening measures take effect. It is projected to slow down further to 6.4 per cent in 2019.

India's recovery, according to the IMF, is expected to be underpinned by a rebound from transitory shocks - like the currency exchange initiative and the rollout of the Goods and Services Tax - as well as robust private consumption. Medium-term growth prospects remain positive, benefiting from key structural reforms. The report also said that CPI inflation in the last fiscal is estimated at 3.6 per cent, close to the midpoint of the Reserve Bank of India's inflation-targeting band, reflecting low food price inflation in the first half of the year. "The current account deficit in FY2017/18 is expected to widen somewhat but should remain modest, financed by robust foreign direct investment inflows," added the report.

In fact, driven partly by the pro-cyclical tax stimulus in the United States, near-term economic prospects for Asia - and the world at large - have improved from the already favourable outlook presented in the October 2017 outlook. Asia is expected to grow at 5.6 per cent this year and next, up 0.1% from the previous outlook. The region continues to be the main engine of the world's economy, accounting for more than 60 per cent of global growth-three-quarters of which comes from China and India alone. Growth in ASEAN is projected to stay at 5.3 per cent both this year and next, reflecting strong investment and consumption across several countries.

But the IMF also sounds a note of caution. "While risks around the forecast are broadly balanced for now, they are skewed firmly to the downside over the medium term," said the report, flagging off risks like further market corrections, a shift toward protectionist policies, an increase in geopolitical tensions and, over the longer term, declining productivity growth.

"Asia remains vulnerable to a sudden and sharp tightening of global financial conditions, while too long a period of easy conditions risks a further buildup of leverage and financial vulnerabilities. These vulnerabilities could be exacerbated by excessive risk taking and a migration of financial risks toward nonbanks," said the report, adding that, "cybersecurity breaches and cyberattacks are on the rise globally, and climate change and natural disasters could continue to have a significant impact on the region".

Interestingly, the latest outlook also explores why inflation has been so low in Asia and it finds it driven by temporary global factors, including commodity prices and imported inflation. But these factors could reverse. "Inflation in the Asia-Pacific region may increase once global factors, including US inflation and commodity prices, become less favourable, and policymakers should stand ready to act. In addition, higher inflation may persist on account of the increasingly backward-looking inflation process. And with a flatter Phillips curve, the output cost of disinflating could be higher," said the report. All of these mean that central banks and policymakers should be vigilant toward any early signs of inflationary pressure.

With output gaps closing in much of the region, the IMF recommended that fiscal policies should focus on strengthening buffers, safeguarding sustainability, and increasing resilience, since the need for continued fiscal support has diminished. "In India, given increased inflation pressure, monetary policy should maintain a tightening bias," it added.

Finally, to reap the full benefits of the digital revolution, the report notes that Asia will need a comprehensive and integrated policy strategy covering information and communications technology, infrastructure, trade, labour markets, and education.