Washington: The Indian economy continues to perform well and remains one of the fastest growing in the world, a top official of the International Monetary Fund said on Tuesday, even as it lowered its growth projection for 2023-24 to 5.9 per cent from 6.1 per cent earlier.
"The Indian economy continues to perform well and remains the fastest growing Asian economy, and one of the fastest growing in the world," Anne-Marie Gulde-Wolf, Deputy Director for Asia and Pacific Department, IMF, told PTI in an interview.
"However, we have revised our projections to incorporate recent data, which were released earlier this year. Based on this information, we now project that growth in FY 2023-24 will be 5.9 per cent, only slightly lower than our previous projection of 6.1 per cent in the January WEO, on the back of an expected slowdown in consumption growth," she said.
"Indeed, we have seen evidence of this deceleration in consumption growth in the data for CY 2022:Q4, as the large so-called 'revenge consumption' boom earlier in the year subsided," Gulde-Wolf said in response to a question.
With consumption slowing, she said, IMF sees the investment as the main driver of growth as evidenced by double-digit credit growth, strong PMIs and an ambitious budgeted government spending programme.
Infrastructure investment has potentially a large impact on medium-term and potential growth and hence is an important policy priority, she said.
Another positive growth contributor is net exports, in particular, exports of services, which have performed very strongly. Significant improvement in the current account last fiscal is expected to continue this year on the back of expected declining commodity prices, the IMF official said.
"Risks are tilted to the downside and mostly stem from external factors, including stronger-than-expected contraction of external demand in partner countries, tighter global financial conditions, and stronger-than-expected spillovers from the recent global financial market volatility," Gulde-Wolf said.
Responding to a question, she said India and China, as two of the world's largest and fastest-growing economies, can act as key economic engines, driving global growth through consumption, investment and trade.
India and China are increasingly becoming hubs for technological innovation, fostering global advancements in sectors like information technology, renewable energy, and AI, she said.
"In the current geopolitical context, China and India can help avoid economic fragmentation. The IMF has highlighted the potential cost and downside risks of economic fragmentation. India and China play an important role in the international arena, including as key members of the G20 and can play a constructive role in maintaining international economic cooperation.
"Finally, as major developing economies, India and China can strengthen South-South cooperation, promoting economic development and stability in other emerging markets and developing countries," Golde-Wolf said.
The IMF, she said, expects growth in China to accelerate this year to 5.2 per cent, from 3.0 in 2022. China's growth alone is expected to explain above one-quarter of global growth in 2023.
This will also generate positive spillovers around the world -- on average, for every percentage point of higher growth in China, growth in other countries is estimated to rise by around 0.3 per cent over the medium term.
The 2023 growth rebound in China will be led by private consumption rather than infrastructure investment -- spillovers to the rest of Asia from higher consumption in China are estimated to be larger than from other growth drivers, such as investment. But the near-term impact on the rest of Asia will vary country by country, with those reliant on tourism likely to reap the most benefits, the IMF official said.
When asked about the key challenges being faced by the Asian countries, Golde-Wolf said in the near term, economies face challenges from inflation -- inflation in most of Asia is not as high as in other countries, but has remained above central banks' targets, despite falling commodity prices.
"In particular, we have seen core inflation remain sticky, which signals that central bank interest rates may have to stay high for longer," she said.
Asian economies also face challenges from more uncertainty in the external environment. Exchange rates and financial conditions and capital flows have fluctuated quite widely over the past year as markets have digested news affecting monetary policy decisions in the US and Europe, she noted.
More recently, the turmoil in specific banks in the US and Europe has not yet had notable direct effects in Asia, but Asian banks could see effects from increases in interest rates and funding costs. In some Asian countries, corporate and household debt levels have also increased substantially, adding to concerns about the possible economic fallout from increasing interest rates, the IMF official said.
Over the medium term, governments will have to restore public finances, after the increases in spending during the pandemic and substantial increases in public debt levels. Governments will need to strike a balance between maintaining growth and fiscal consolidation, pointing to the need for "growth-friendly" efforts to increase government revenues based on efficient tax reforms, and more efficient government spending, she said.
In many Asian countries GDP growth will likely slow over the medium term, because of ageing populations and lower productivity growth, pointing to the need for structural and labour force reforms. India remains a counterexample where, with appropriate policy measures, a "demographic dividend" may help fuel actual and potential growth.
Policies needed to harness the demographic dividend include a range of measures, including, in particular, education, health, and structural measures to absorb the growing labour force, she said.
The current geopolitical situation could complicate the environment for many Asian countries, especially those that rely heavily on exports and supply chains. Governments could find themselves having to navigate geopolitical tensions and diversify trade relations. Fostering regional cooperation and integration are crucial for economic resilience, Golde-Wolf said.
Observing that like for the rest of the world, the Ukraine crisis was a further shock for Asia and disrupted the recovery from the Covid period, the IMF official said that commodity and food prices surged and supply chains came under severe stress. For example, oil prices almost doubled (through June 2022), and shipping costs tripled (through September 2021) following Russia's invasion of Ukraine.
But despite the stresses, Asia's growth was comparatively resilient following a relatively good performance in the second half of 2022.
"We estimate the region as a whole grew by 3.8 per cent in 2022. This performance was the result of relatively strong external demand from Europe and the US and resilient domestic demand, even though the reopening of most Asian economies was somewhat later than in the rest of the world.
"The Chinese economy avoided a contraction despite intermittent lockdowns in November and a bumpy reopening in December," she noted.