New Delhi: The International Monetary Fund (IMF) on Monday said the Indian economy will grow slower than what it had estimated just three months ago because of higher crude oil prices and speedier interest rate hikes.
In an update to its World Economic Outlook (WEO), IMF trimmed India’s growth projection for 2018-19 by 10 basis points to 7.3%, citing negative effects of higher crude oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher-than expected inflation. For 2019-20, IMF cut its projection by a sharper 30 basis points to 7.5%.
The Economic Survey 2017-18 presented on 29 January had estimated that every $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage point, increases wholesale inflation by about 1.7 percentage points and widens current account deficit by about $9-10 billion.
Fears of a global supply crunch following outages in Libya and Venezuela have led to an almost 5% jump in crude oil prices since April when IMF released its WEO. Crude oil prices retreated below $71 a barrel on Monday ahead of a summit between US president Donald Trump and Russian president Vladimir Putin.
The Reserve Bank of India (RBI) on 6 June raised the repo rate by 25 basis points to 6.25%—the first rate hike in more than four years—citing higher risks from rising inflation. With retail inflation quickening to 5% and wholesale price inflation at 5.77% in June, analysts do not rule out a rate hike next month in its policy review on 1 August.
IMF said India’s growth is expected to rise from 6.7% in 2017-18 to 7.3% in 2018-19 and 7.5% in 2019-20, as the effects of demonetisation and the introduction of the goods and services tax fade. “The projection is 0.1 and 0.3 percentage point lower for 2018 and 2019, respectively, than in the April WEO, reflecting negative effects of higher oil prices on domestic demand and faster-than-anticipated monetary policy tightening due to higher expected inflation,” IMF said.
“The recently announced and anticipated tariff increases by the US and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects,” it added.