Washington: India is likely to witness a larger-than-expected fall in its economic growth rate at 5.4 percent in 2012-13 but it should pick up to six percent in next fiscal, the International Monetary Fund (IMF) said on Wednesday.
"In 2011-12, India's growth rate was 6.5 percent. That figure is expected to drop to 5.4 percent in 2012-13. Despite the poor outlook for the global economy, this is a far larger drop than might be expected," the IMF said releasing its annual country report following its consultations on India.
This is a substantial drop from the impressive growth rate of an average of 8.3 percent India registered between 2004 and 2011.
The government last month revised downward the economic growth for fiscal 2011-12 to 6.2 percent from the earlier estimate of 6.5 percent.
In its report, the IMF Executive Board Directors said India's growth has slowed markedly due to structural and cyclical factors, while inflation remains at elevated levels.
RBI has recently lowered country's GDP forecast to 5.5 percent in 2012-13 as against 5.8 percent estimated earlier.
A common response to slow growth is the use of countercyclical fiscal or monetary policy, but this is inappropriate for India, IMF said.
High inflation means there is little room to cut interest rates, while India's fiscal deficit means that controlling, rather than raising, spending is a priority, it added.
The government has already moved to lower fuel subsidies, which disproportionately benefits richer people. It will need to do more to free sufficient resources for 12th Plan priorities, including a comprehensive reform of fuel subsidies, the IMF said.
It said though the growth is projected at 5.4 percent for 2012-13, but it should pick up to six per cent in 2013-14.
The economy grew by 5.4 percent in the first half of the current fiscal. It is likely to grow by 5.7 percent in the current fiscal, which would be a decade's low.
In their report, the IMF economists warned about threats posed by the financial sector. The number of non-performing loans has risen recently, and the current slowdown raises the prospect that this trend will continue for some time, it said.
In the long run, ensuring India's financial system is able to underwrite strong growth will require pushing forward with financial reforms, such as developing the corporate bond market and gradually lowering government-mandated purchases by banks of government debt, the IMF said.
Referring to the recently published 12th Plan that calls for major investments in infrastructure, health, and education, as well as for continued poverty reduction, IMF economists say reforms to facilitate investment - especially in infrastructure- together with lower costs to do business, are key to restoring high growth.
"The government has already taken significant steps to restore growth, for example by laying out a plan to cut the losses of local power companies, creating the Cabinet Committee on Investment, and relaxing some restrictions on foreign direct investment," it said.
"But more needs to be done," the IMF said.
Addressing India's long-term energy needs, for example, will require solving complicated problems related to coal (which powers most of India?s electricity plants), while easing traffic jams will require facilitating the acquisition of land to widen roads or build new ones, it added.
According to the IMF report, the slowdown in the Indian economy has been due to structural and supply-side factors, with cyclical and global factors also contributing.
Capital inflows remain resilient suggesting that the financial channel has not been prominent in the transmission of external shocks.
Mainly led by falling infrastructure and corporate investment, the slowdown has now generalised to exports and private consumption, it said.
The current account deficit widened to 4.2 percent of GDP in 2011-12, causing the rupee to depreciate sharply before its recent stabilisation. The financial positions of banks and corporates, both strong before 2009, have deteriorated.
"With policy space strictly circumscribed because of high fiscal deficit and elevated inflation, the economy is in a weaker position than before the global financial crisis.
"In recent months, the authorities have taken steps to reverse the slowdown, which have led to improved market sentiment," the IMF said.
Continued implementation of measures to facilitate investment and slightly stronger global growth should deliver a modest rebound in the near term.
Inflation is forecasted to remain above the Reserve Bank of India's comfort zone given that supply constraints are likely to ease only gradually.