India emerges as global growth star, says IMF

India has the potential to experience higher growth contributed by additional labour and human capital if comprehensive reforms are implemented, IMF report said.

• Pramod Thomas
• 19 December, 2023

By: Pramod Thomas

INDIA has emerged as a star performer and is projected to contribute more than 16 per cent of the global growth, the International Monetary Fund (IMF) said on Monday (18).

In its annual Article IV released on Monday in consultation with India, the IMF said the country, with its “prudent” macroeconomic policies, is on track to be one of the fastest-growing major economies in the world this year.

Nonetheless, India’s economy faces global headwinds, including a global growth slowdown in an increasingly fragmented world, the fund added.

“What we have been observing for quite some time now is that India has been growing at a very robust rate. It’s one of the star performers when it comes to real growth, when you look at peer countries. It’s one of the fastest growing large emerging markets and it’s contributing, in our current projections, more than 16 per cent of global growth this year,” Nada Choueiri, the Mission of India at IMF, said in an interview.

Choueiri attributed growth rate to economic reforms in key sectors such as digitisation and infrastructure.

There is a strong push by the government to invest in infrastructure and develop the logistics needed for growth, Choueiri said.

India has a large and young and growing population and thus has the potential to grow at stronger rates if this is harnessed through structural reforms, Choueiri added.

In its annual report the IMF recommended that policy priorities should focus on replenishing fiscal buffers, securing price stability, maintaining financial stability and accelerating growth through structural reforms while preserving debt sustainability.

India’s economy has rebounded from the pandemic to become an important driver of global growth. After surging during the fiscal years of 2022-2023, headline inflation has, on average, moderated, although it remains volatile.

Employment has surpassed the pre-pandemic level, the IMF said in its India report.

It added, “The financial sector has been resilient, largely unaffected by global financial stress in early 2023. While the budget deficit has eased, public debt remains elevated, and fiscal buffers need to be rebuilt.

“Globally, India’s 2023 G20 presidency has demonstrated the country’s important role in advancing multilateral policy priorities.

“On the political front, general elections are expected in April 2024. Macroeconomic policies have been partly in line with the past IMF staff advice.”

India has the potential to experience higher growth contributed by additional labour and human capital if comprehensive reforms are implemented, according to the fund.

Further, the country’s digital public infrastructure has potential to raise total factor productivity by fostering innovation and competition, accelerating financial inclusion and boosting public sector efficiency.

Choueiri said the IMF believes there is a need for labour reform in the country.

“India has labour in abundance. And labour is not used to its potential in India. In our view, there has to be a very concerted effort to make sure the advantages, and demographics in

India are played up to the maximum,” she said, adding that this means education, skilling, and increasing female labour force participation.

Observing that GDP growth reached 7.2 per cent in fiscal 2022-2023, moderating from 9.1 per cent in FY2021-2022, the IMF said growth has been supported by consumption stemming from pent-up demand of households and strong investment, with historically high levels of public capital expenditure.

Strong global demand for outsourcing induced by the pandemic pushed up service export growth to a decade high in FY2022-2023, raising net exports.

Services exports lost some momentum in early FY2023-2024, largely reflecting demand slowdown in partner countries, but GDP growth remained strong at 7.8 per cent in FY2023-2024Q1, supported by robust domestic demand, the IMF report said.

Choueiri noted that political stability was important for investment and growth.

“We have not done any quantitative analysis around that to be able to put a number, but there is a lot of research that points to the importance of having, political stability and a clear policy environment, not just at the politics level, but in terms of policies for businesses to know what the taxes are going to be, what the procedures are going to be.

“So this kind of transparent and future business environment is also important for investment and growth,” she said.

Choueiri made the case for easing of bureaucracy for investors, saying, although the government has taken a lot of steps, more needed to be done.

“It’s a glass half full, they’re still important procedures that are needed to simplify further. But there are important steps that were taken. For example, the single national window, the one-stop shop for companies is a very important one. But still, in many states, there’s a lot of bureaucracy that needs to be tackled and streamlined and a lot of red tape. So this is also a work in progress that needs to be continued,” she said.

The IMF, in its report, noted that India’s recent inflation dynamics had not followed the same pattern as in other countries.

Choueiri said: “We see a lot of risks from fragmentation. We’ve been pointing those out. We also see more medium-term risks from climate change. Although it’s a slow-moving phenomenon, the impact of climate change, we are seeing them every day through erratic weather patterns. India is significantly impacted by that.”

These are important risks that need to be heeded and managed properly, the IMF official said. “India is doing well. It has tremendous potential. Several important policies need to be addressed to harness that potential,” Choueiri added.

(PTI)