IMF slashes India’s potential GDP forecast to 6%

NEW DELHI: The International Monetary Fund (IMF) on Monday reduced its forecast for India’s potential growth by 25 basis points (bps) to 6%, citing the coronavirus pandemic’s impact on investments and the labour market. Potential growth refers to the growth rate an economy can sustain over the medium term without generating excess inflation.

“We think the impact (of the pandemic) is coming from the capital accumulation channel. Investment took a big hit; that means capital stock is somewhat lower than it would have been otherwise. Then, of course, there is some damage to the labour market. So, we have reduced potential growth (of India) by 25 basis points to 6%,” Alfred Schipke, mission chief for India at the IMF said.

Schipke, however, said that if the government fully implements structural reforms and advances its privatization plans, that could be an upside to the IMF’s own potential growth projection. “We know from experience of other countries that implementing important structural reforms takes time. So, the key is to implement it fully,” he added.

Jarkko Turunen, deputy division chief at Asia and Pacific Department of the IMF, highlighted the human capital component in the labour market distortion caused by the pandemic. “We have seen reduced access to education and training due to the pandemic and would expect that would weigh on human capital growth looking forward. This would have an adverse impact on labour markets and potential output. This is quite important to address,” he added.

In the Article IV consultation report on India released on Friday, the IMF said a persistent negative impact of Covid-19 on investment, human capital, and other growth drivers could prolong the recovery and impact medium-term growth.

“While India benefits from favourable demographics, disruption to access to education and training due to the pandemic could weigh on improvements in human capital. At the same time, the recovery could also be faster than expected. Faster vaccination and better therapeutics could help contain the spread and limit the impact of the pandemic. In addition, successful implementation of the announced wide-ranging structural reforms could increase India’s growth potential,” the report said.