Washington: With the world economy entering yet another transition, the International Monetary Fund (IMF) expects India to grow at around 3.8 percent in fiscal 2013, about 1.8 percentage points lower than its July projection.
For fiscal year 2014, growth is projected to accelerate somewhat to 5 percent, again 1.1 percentage points lower than projected in July, helped by an easing of supply bottlenecks and strengthening of exports, the IMF said in its Fall 2013 World Economic Outlook (WEO).
The IMF attributes India's lower growth in 2013 to "strong agriculture production offset by lacklustre activity in manufacturing and services, and monetary tightening adversely affecting domestic demand".
"Inflation is expected to stay high at almost 11 percent this year and 9 percent in 2014, driven by continued domestic food price pressures," the IMF said in its report released in Washington on Tuesday ahead of this week's IMF-World Bank annual meetings.
In the current "transition" phase, the IMF said advanced economies are gradually strengthening, while growth in emerging market economies has slowed.
"This confluence is leading to tensions, with emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions," it said.
The slowdown reflects more cyclical factors in Russia and South Africa and more decreased output growth potential in China and India.
While some decrease in growth relative to the 2000s is inevitable, structural reforms can help ease the adjustment and are becoming more urgent, the IMF said, suggesting "from rebalancing toward consumption in China to removing barriers to investment in Brazil and India".
Noting that the US economy remains at the centre of events, the WEO said "private demand continues to be strong, although growth has been hobbled this year by excessive fiscal consolidation".
"Politics is creating uncertainty about both the nature and the strength of the fiscal adjustment," it said.
Calling the sequester "a bad way to consolidate", the IMF warned "conflicts around increasing the debt ceiling could lead to another bout of destabilising uncertainty and lower growth".
"Nevertheless, it is time for monetary policy to make plans for an exit from both quantitative easing and zero policy rates," it suggested.
During the first half of 2013, growth in Asia generally moderated and was weaker than anticipated in the April 2013 WEO.
This was due to a more rapid slowdown in the pace of growth in China, which affected industrial activity in much of emerging Asia, including through supply-chain links, while India faced persistent supply-side constraints, the IMF said.
For a few countries, including India, the recent market pressure has put a further premium on strengthening public finances and implementing structural reforms, the IMF said.
If downside risks to growth materialise, exchange rate flexibility and monetary easing should generally be the first lines of defence in economies where inflation is low and expectations are firmly anchored.
However, in some economies more tightening may be called for given continued inflation pressure, further amplified by currency depreciation, it said, citing the example of India and Indonesia.
On the fiscal side, automatic stabilisers should be allowed to play, but high deficits make fiscal consolidation a priority in a number of economies, such as India, Japan, and Vietnam. In others, stimulus should be considered only if a serious slowdown threatens, IMF said.
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