Don’t miss the fine print in the IMF annual report

India’s growth will depend on how well it balances policies with demands of voters

The International Monetary Fund (IMF) released the results of its annual assessment of the Indian economy this week. The good news is that India’s growth trajectory has recovered from the disruptions caused by demonetisation and the teething troubles after the introduction of the Goods and Service Tax (GST). Real GDP growth in the fiscal year 2019-20 is expected to be 7.5%, the second highest under the Modi government. While there is always an element of uncertainty in such projections, it is the broad direction of continuous improvement in projected growth rate which is more important. The Fund has also praised India for its overall economic management on both domestic and external fronts. While the IMF notes risks to growth and macroeconomic stability such as rising oil prices, turbulent global trade environment and possible slippage in GST collections, it has decided against pressing the panic button yet.

The overall endorsement notwithstanding, the assessment also contains observations which need attention. First is the question of interest rates. While lauding the Reserve Bank of India for raising interest rates in the face of rising inflation — and the Fund expects inflation to increase even more — the document calls for further tightening of monetary policy in the near future. Similarly, the IMF notes that lower Minimum Support Prices (MSPs) and petroleum subsidies have been crucial for the fiscal consolidation process in the past few years.

These observations are proof that there is a gap between the desired policy framework of institutions such as the IMF, whose endorsement is important in shaping sentiment of foreign capital, and large sections of Indian consumers and entrepreneurs, who are also voters. India’s long-term economic prospects will depend on how well our policy makers balance the two.