Why the IMF revised India's growth projection and why it doesn't matter

• The International Monetary Fund (IMF) revised the it’s growth projection for India to 7.3% from the original forecast of 7.4%.
• This is in reaction to how the increase in oil prices will affect future consumer demand.
• Also, considering the current level of inflation in the economy, IMF expects India’s monetary policy to tighten further.

The International Monetary Fund (IMF) has revised its growth projection for India by 0.1 percentage point for 2018-19. Instead of the original estimate of 7.4%, the revised estimate now stands at 7.3%.

Though the initial 0.1% doesn’t seem like that big a deal, its effect follows the projection of 2019-20 where it culminates into a 0.3 percentage point decline from the original 7.8%.

The reasons why

According to the IMF, the revised estimates took the hike in oil prices and monetary policy parameters into consideration. Any increase in the price of oil has an adverse effect on the fiscal and current deficit since oil is India’s largest import commodity. That, in turn, has an effect on the monetary policy, consumption and investments.

The monetary policy is an instrument at the disposal of a country’s monetary authority to maintain price stability in the country. And, considering the hike in global crude prices, the Reserve Bank of India (RBI) increased the policy rate by 25 basis points just last month to counter inflation.

A hike as huge as this hasn’t been seen in four years. And, it might not be the end.

The IMF actually expects the monetary policy to tighten further, considering that the wholesale price index is facing a four-year high. Even the consumer price index inflation rate is at a five-month high.

But, they also added that the disruption caused by implementing the goods and services tax (GST), and the exercise in demonetisation, is over.

Alignment

The revised estimate of the growth rate is in sync with what other agencies has put forth as their forecast for the Indian economy. The World Bank and the Asian Development Bank (ADB) had already predicted a 7.3% growth rate of India in 2018-19.


Does it matter?

The rates for most emerging economies, including Argentina and Brazil, have been revised. Even so, India will still be the fastest growing economy among the larger nations for both years.

It should be noted that though economic forecasts send a message of predictability and certainty, they are, at the end of day, based on human behaviour. Regardless of whether that’s consumption patterns or export behaviour.

Weather forecasts are based on physics, and even they get it wrong a lot of the time.