Output gap closes in

AFTER DIPPING to a low of 6.7 per cent in FY18, India’s economic growth is expected to rebound to 7.3 per cent in FY19, notes the International Monetary Fund (IMF), in its review of the Indian economy under Article IV. As seen in Chart 1, the IMF now expects India to grow at

7.5 per cent in FY20.

Investments are expected to witness a sharp turnaround, with the IMF expecting gross investments to reach 32.2 per cent of GDP in FY19, up from 30.6 per cent in FY18 (Chart 2).

The Fund estimates that India’s potential GDP stood at 7.3 per cent in FY18. As seen in Chart 3, it notes that “much of the recent acceleration is due to an increase in total factor productivity, which have more than offset a dwindling contribution from the physical capitalstock, attributable to the prolonged period of subdued investment growth”.

Based on this assessment, it concludes that “[w]ith the output gap closing, inflation rising and forecasted to be above the mid-point of the target band in the near and medium term, and inflation risks on the upside, further tightening would anchor expectations and build monetary policy credibility” (Chart 4).

Separately, the IMF has projected the inflation rate to rise to 5.2 per cent in FY19 as seen in Chart 5. And while export growth is expected to pick up to 13.2 per cent in FY19, up from 10.3 per cent in FY18 (Chart 6), the Fund expects the current account deficit to rise to 2.6 per cent in FY19 as shown in Chart 7.

On the other hand, the Fund expects the government to stick to the path of fiscal consolidation. It has projected both the general government (Centre and states) fiscal deficit (Chart 8) and debt (Chart 9) to decline in the coming years.