What Gita Gopinath highlighted about the India growth story?
There were not too many surprises as Gita Gopinath squarely placed the blame for the growth downgrade by the IMF on weakness in credit market and tepid rural demand and income levels. Here are 10 things that Gita Gopinath highlighted.
- IMF lowered India’s GDP growth projection to 4.8% for FY20 and a slightly improved 5.8% for FY21. Gopinath highlighted that weakness in credit off-take had been rampant in the aftermath of the NBFC crisis in 2018 and that had seriously hampered the growth of last mile credit delivery.
- The IMF economist pointed to weak rural income growth as another key reason for the growth downgrade and underlined that any recovery was unlikely before June 2020. Gopinath also pointed that the confidence in doubling farm incomes by 2022 appeared to be largely impractical.
- Gopinath was fulsome in her praise for India’s central bank, RBI, for persisting with a dovish policy and cutting rates by 135 basis points in the calendar year 2019. While there have been concerns over the efficacy of monetary policy, Gopinath expects that RBI policy rate cuts will stimulate growth over next 12 months.
- Speaking on the sidelines of Davos, Gita Gopinath ruled out any leniency in the fiscal responsibility roadmap. She pointed out that the thrust on encouraging rural spending would have to be done outside the ambit of letting fiscal deficit slip. That means; the government should use the 50bps fiscal leeway only as a temporary measure.
- Gopinath pointed out that the major priority was to stimulate growth without stimulating inflation. She pointed out that the current policy of consumer credit was stimulating consumption driven inflation without expanding industrial growth. She also warned that industrial credit growth will have to be achieved without NPA worries.
- The corporate tax cut was likely to show effect only over the next couple of years but the bigger challenge would be filling up the resource gap. Gopinath pointed out that the Rs145,000cr gap will have to be filled without letting the fiscal deficit slip at a time when direct and indirect taxes were likely to disappoint.
- The IMF chief economist suggested that more than fiscal consolidation, the focus must be on the quality rather than on the quantum of fiscal spending. For example, fiscal spending on rural incomes, health, infrastructure and education have a multiplier effect and that is something the government will have to factor.
- On the topic of the important China-US trade deal, Gopinath pointed that while there was room for optimism, the risks were still not off the table. She also pointed out that as a result of the trade war, the global GDP growth was scaled down to 2.9% with India accounting for nearly 80% of the global growth downgrade.
- The IMF still believes that India’s growth slowdown is more cyclical rather than structural. That means, if the issues like rural incomes, industrial credit and NBFC stress are addressed, then GDP growth could come back on track. IMF has projected 4.8% for 2019, 5.8% for the year 2020 and 6.5% for the year 2021. Gopinath feels this can be achieved through monetary stimulus rather than through fiscal stimulus.
- Finally, there could be some concerns for economist looking at the India versus China story. The IMF has revised China’s growth upward by 20 basis points to 6% for 2020, giving China a full 120 bps advantage over India. Consequently, Gopinath has raised serious doubts over $5 trillion GDP target for India by 2025 as that would imply 8-9% real growth over the next five years to reach the target, which looks unrealistic.