IMF on India: According to a key official from the International Monetary Fund, successful macroeconomic management of the Covid-19 outbreak led to a significant rebound in India’s economy, putting the country in a better position to deal with the economic impact of the current Ukrainian crisis.
India’s growth is lifting the global economy and is very important for a well-functioning global economy, according to IMF Mission Chief for India Nada Choueiri, who noted that India represents about 7% of the total world economy in purchasing power parity (PPP) terms and is one of the fastest-growing countries.
India is a major Vaccine manufacturer
“So, you’ve made a significant contribution. “The distribution of vaccines is another essential role that India plays today,” she added on Wednesday.
India, as a major vaccine producer, has a role to play in future pandemic management, she added.
“The pandemic’s macroeconomic management has resulted in a robust recovery, albeit it is yet unfinished. As a result, India is in a far better position now to deal with the problem resulting from the Ukraine shock than it was during the taper tantrum. But, as a result of the shocks, the world economy is in a very tough position today,” Ms. Choueiri said.
She gave her assessment of the Indian economy’s performance amid the global economic crisis, which began with the Covid-19 pandemic, and claimed India took significant steps across a range of policies.
“We watched excellent fiscal management in action to get things right, generate fiscal room, and respond to the population’s immediate needs.” We also observed proactive monetary policy in response to the financial system’s and corporate sector’s liquidity demands throughout the epidemic,” she said.
The IMF lowered its growth forecasts this year from nine percent for 2022 to 8.2 percent (a loss of 0.8 percentage points) in its latest World Economic Outlook.
The crisis in Ukraine
This, according to Ms. Choueiri, is largely attributable to the conflict in Ukraine.
“The war in Ukraine and its impact on India’s economy account for about 0.6 percentage points of that. There are various options available to us. Oil and other commodity prices are, of course, the first and most immediate conduit. We’ve seen these rise, and we expect them to stay high for a long time,” she added, noting that this has an impact on real earnings and, as a result, domestic demand, which will slow development.
The other channel, according to the IMF official, is external demand, which is a global economic slowdown caused by the war in Ukraine, particularly in Europe, India’s most important trading partner.
“We believe this is due to a drop in external demand for India’s exports.” As a result, exports will expand at a slower rate than we anticipated in January,” she said, explaining why India’s GDP growth predictions for this year had been cut by 0.6 percentage points due to the conflict in Ukraine. According to her, the base effects account for another 0.2 percentage point reduction.
“Because our database has been updated.” In comparison to January, we have Q4 data releases and some historical data that have been updated. As a result, these are the basic impacts, which result in a 0.2 percentage point decrease in growth. As a result of these base effects, we went from nine to 8.8. Then we dropped to 8.2, a 0.6-percentage-point drop due to Ukraine,” she explained.
Ms. Choueiri stated that India is recovering from the pandemic’s economic effects. In the fiscal year 2021, there was a severe recession, with GDP falling by 6.6 percent. And there was a significant improvement from the previous year. Last year’s growth rate was estimated to be 8.9%.
“This is a fantastic comeback.” And this is despite a particularly harsh second wave, which occurred in the first quarter of the recently concluded fiscal year. Despite this, we see a solid recovery that began last year and is currently ongoing,” she said.
According to the current predictions, India’s GDP will fall to 6.9% next year and remain around 7% for the next few years. In response to a query on the Indian economy’s challenges, Choueiri named the Ukrainian war as the most serious.
“The danger is that this battle will drag on even longer, with no end in sight.” As a result, economic upheaval and supply chain and commodity market disruptions are becoming even more severe than expected. As a result, this is a significant danger that we are concerned about. “Of course, the pandemic is still a threat that we are concerned about. “The pandemic isn’t ended yet,” she remarked.
COVID-19 should be avoided
India is becoming one of the world’s most immunized countries. However, the possibility of emerging vaccine-resistant strains remains. And this is something for which we must keep an eye out, she added.
The third biggest danger, according to the IMF India chief, is a change in global financial circumstances. Inflation is currently a major concern in many advanced countries in Europe and the United States, and there is a perception that monetary policy may need to tighten sooner than markets predict.
“A big move in monetary policy beyond what the market anticipates to try to moderate these inflationary pressures,” she said, “might trigger an abrupt adjustment in global financial conditions, which could have a detrimental impact on India.” Ms. Choueiri stated that, in comparison to other countries, India was able to utilize its policy space well during the pandemic.
“We witnessed the authorities undertake a strong fiscal, monetary, and financial sector reaction to provide liquidity support to MSMEs and corporates, to assist in-kind and cash transfers to vulnerable people, and to promote rural employment programs,” she said. According to Ms. Choueiri, fiscal management got a number of things right, including boosting the fuel excise at the start of the pandemic when prices were falling dramatically to provide budgetary flexibility.
“This extra-budgetary headroom has allowed India to provide the support it did during the pandemic,” she said. “So, we think India did pretty well in terms of macro-management of the economic crisis and was able to use the policy space it had to provide support,” she said, adding that the monetary policy space performed similarly.
Reserves in foreign currency
Observing that the Ukraine war is bringing a plethora of new obstacles on top of the pandemic issue, Ms. Choueiri claimed that India has a lot of qualities that will help it weather the storm. “First, we notice that the central bank has a substantial quantity of foreign exchange reserves,” she remarked. India, she argued, has a high production of staples that will assist insulate it from the global food crisis, which is harming the world economy, particularly emerging markets and developing nations.
“As a result, the Ukraine shock continues to unfold. And we’ll have to see what policies are in place to deal with it, but so far, we’ve seen that (India) has the necessary tools in place to deal with the problem,” she said. Given the shock to oil and food prices, the IMF India chief noted that, on the fiscal side, India might consider providing more help to those who are directly impacted by this in the form of additional direct in-kind transfers or cash transfers to the neediest.
Ms. Choueiri stated that monetary policymakers must be aware of second-round effects and convey how they view them and what actions they will take to try to mitigate them and avoid India from experiencing chronic high inflation.