IMF Revamps Growth Forecasts, Experts Caution Against Potential Challenges

The International Monetary Fund has raised its growth forecast for India, stating that the country’s growth will remain strong in 2023 and 2024. However, analysts warn that there will be challenges ahead.

According to the IMF’s October update of its World Economic Outlook, India’s economy is projected to grow by 6.3% in 2023, which is an increase from the earlier forecast of 6.1%.

Economists interviewed by CNBC are also optimistic about India’s growth, attributing it to increased consumption, infrastructure spending, and the rise of new businesses. However, they also highlight geopolitical risks and concerns about inflation as potential challenges.

“India will continue to be a bright spot in the global economic picture,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis.

She added, “The country has been favored by foreign investors in recent years, reflecting its promising long-term outlook helped by a youthful demographic and a fast-expanding middle class. We expect this trend to continue.”

Garcia-Herrero also emphasized that consumer spending remains one of the biggest drivers of growth in India.

According to a report by BMI, a Fitch Solutions research unit, India’s consumer market is set to become the world’s third largest by 2027, as the number of middle to high-income households increases.

“India is on the map. There is a lot of pent-up demand and sentiment is very positive. There is a sense that India is back on the frontline, and the media’s propaganda also contributes to increased consumption,” Garcia-Herrero added.

Nilesh Shah, managing director at Kotak Mahindra Asset Management, stated that India’s government has implemented several measures to improve business conditions, attracting both global and local investors.

“The China-plus-one strategy is also driving the relocation of global supply chains, and India stands to benefit from it,” Shah added.

The optimism in India’s growth story is partly due to more Indians choosing to work or start businesses in the country, rather than seeking opportunities in the Western world.

“The appeal of the West has diminished, while India has become more appealing, at least for highly talented individuals,” Garcia-Herrero said.

While the IMF maintained its 2024 projection of 6.3% growth for India, economists anticipate that the country will face several headwinds.

“Widening current account deficit, resurging inflation, and heightened geopolitical tensions will be the major challenges for India,” Garcia-Herrero warned.

Although India’s pre-election environment is favorable for growth, the loose monetary policy of the Reserve Bank of India may lead to future problems, according to the economist.

She stated, “India is not increasing productivity as much as needed to sustain its growth over time. However, this will only become a problem in the next two decades and is not an immediate concern.”

Extreme weather events will also impact India’s growth.

Heatwaves and droughts have caused water levels in southern Indian reservoirs to fall below the ten-year average, affecting agriculture and rural recovery, as noted by Shah from Kotak Mahindra Asset Management.

Geopolitical tensions have escalated due to conflicts between India and Canada, as well as the attack on Israel by Palestinian militant group Hamas, resulting in a more than 4% spike in oil prices on Monday.

“Since India imports over 80% of its oil consumption, higher prices will negatively impact India’s trade and fiscal deficit, inflation, and growth,” Shah explained.

Despite the overall optimism about India’s growth, Garcia-Herrero emphasized the need for foreign investments to sustain the economy.

“As India competes with China to lead the global south, it requires more foreign investments to create manufacturing jobs,” she stated.

The IMF’s report on Tuesday stated that the global economy will continue to recover slowly due to the ongoing Ukraine war, high inflation, and the aftermath of the pandemic.

The projections show that global growth will decline from 3.5% in 2022 to 3% this year, and further decline to 2.9% in 2024.

“Growth remains slow and uneven, with growing global divergences. The global economy is limping along, not sprinting,” stated the IMF.

The IMF also raised its growth projections for the U.S. in 2023; forecasting a growth rate of 2.1%, up by 0.3 percentage points from its July report, and a forecast of 1.5% for next year, up by 0.5 percentage points.