India’s chief financial advisor on IMF development downgrade
Traffic jam on the Delhi-Meerut Expressway on July 29, 2021 in Ghaziabad, India.
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India’s chief economic adviser Krishnamurthy Subramanian hit back at the International Monetary Fund for downgrading the country’s growth forecast, saying it was “well off”.
The IMF last week cut India’s growth outlook for the fiscal year ending March 2022 to 9.5% – 3% less than its April forecast of 12.5%. In an accompanying report, the IMF said India’s outlook has been downgraded following a severe second wave of the Covid-19 outbreak and an “expected slow recovery in confidence after this setback”.
Speaking to CNBC’s Street Signs Asia on Monday, Subramanian claimed the IMF’s assessment was driven by “saliency bias” – which puts more focus on suspicious information while ignoring comparatively less noteworthy data. He said India disagreed with the downgrade.
“Our forecasts weren’t as high as yours, and we don’t think the revision is justified,” said Subramanian of the 3% downgrade. “I would say that the IMF is clearly wrong.”
The Indian government’s expectations are more in line with the Reserve Bank of India, which revised its forecast growth rate down by 1% to 9.5% in June, he added.
To be clear, both the RBI and IMF now have the same growth forecast for India – the fund previously had a higher forecast of 12.5% growth compared to the central bank’s 10.5%.
Effects of India’s Second Wave
According to Subramanian, the economic impact of the second wave should not be as great as that of the first.
He gave three reasons for this assessment: First, the duration of the second wave was comparatively shorter than the previous outbreak.
Cases rose to record levels between late March and early May during the second wave – in the first wave, daily infections rose from mid-June last year and peaked in September. Nevertheless, the total number of daily reported cases was significantly higher during the second wave than in the first wave.
Second, most of the Covid-related lockdowns were carried out at the state level, unlike the first wave last year when India closed most of the country for several months.
The locks that year “were asynchronous in time and heterogeneous in intensity,” said Subramanian. He added that neither vital goods nor interstate transport would be as badly affected, which is likely to further reduce the economic impact.
In the fiscal year ended March 31, India’s economy contracted 7.3%.
At an industry virtual conference last month, Subramanian reportedly said he expected India to grow between 6.5% and 7% from fiscal 2023 onwards.
Some economists say there are already signs of an improvement in economic activity as restrictions were eased when the second wave of cases peaked in early May.
However, Societe Generale’s Kunal Kundu warned in a note last week that green shoots emerging in India were “still patchy at this stage.” As the recovery is not yet in full swing and a third wave of infections is looming on the horizon, India’s growth trajectory needs to be “carefully promoted”, Kundu said.
Inflation will be sectoral
Rising prices are a growing concern in many countries. If inflation persists, it could force central banks to tighten their ultra-loose monetary policies, for example by raising interest rates.
India’s retail inflation rose 6.26% YoY in June, while prices rose 6.3% in May – the numbers were above the RBI’s 2% to 6% inflation target range.
However, Subramanian said he expected inflation to be tied to the range.
“I expect it to be between 5 and 6% because the restrictions imposed as a result of the second wave had some impact on the supply and therefore the prints have been over 6% for two months,” he said. The prices have moderated from month to month, he added.