India star performer, projected to contribute over 16% of global growth: IMF

Growing at a robust rate due to economic reforms in key sectors like digitisation and infrastructure, 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.

“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, told PTI in an interview.

The IMF on Monday released its annual Article IV consultation with India, according to which the South Asian country, underpinned by prudent macroeconomic policies, is on track to be one of the fastest-growing major economies in the world this year.

Nonetheless, the economy is facing global headwinds, including a global growth slowdown in an increasingly fragmented world, Choueiri said.

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

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

The government has done several structural reforms, the flagship one being the digitalisation, which has been building up over many years and has put India on a strong platform for increased productivity and growth in the future.

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

India’s economy has rebounded strongly from the pandemic to become an important driver of global growth. After surging during FY2022/23, headline inflation has, on average, moderated although it remains volatile. Employment has surpassed the pre-pandemic level and the informal sector continues to dominate while formalisation has progressed, it said.

“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,” it said.

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

India has the potential to experience higher growth contributed by additional labour and human capital if comprehensive reforms are implemented. Furthermore, the country’s foundational digital public infrastructure has significant potential to raise total factor productivity by fostering innovation and competition, accelerating financial inclusion, and boosting public sector efficiency.

Observing that GDP growth reached 7.2 per cent in fiscal 2022/23, moderating from 9.1 per cent in FY2021/22, the IMF said growth has been supported by robust 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 FY2022/23, raising net exports. Services exports lost some momentum in early FY2023/24, largely reflecting demand slowdown in partner countries, but GDP growth remained strong at 7.8 per cent in FY2023/24Q1, supported by robust domestic demand, it said.

Responding to a question, Choueiri noted that political stability is 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.

The government has taken a lot of steps to encourage the business environment. “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, she said, believes that there is a need for labour reform.

“India has in abundance labour. And Labour is not used to its potential in India. And so, in our view, there has to be a very concerted effort to make sure that 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.

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

Observing that the external environment is very tricky and it is not very supportive, 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 said.

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Umang Sharma