MUMBAI: Indian economy is expected to grow at 7.4 per cent this fiscal, but bound to accelerate further to 7.8 per cent as it recovers from the impact of demonetisation and GST roll out, according to IMF.
This is higher than the projected growth rate of Asia at 5.6 per cent this fiscal and next. But the outlook is supported by strong global demand, accommodative policies and financial conditions. Interestingly, inflation in Asian economies too is among the lowest in decades, though it has seen some upward movement since September 2017, largely due to rising oil prices.
“But there are risks and challenges ahead, including from a tightening of global financial conditions, a shift toward inward-looking policies, and over the longer run, population aging, slowing productivity growth and the rise of the digital economy,” it said.
In its Regional Economic Outlook: Asia and Pacific, released on Wednesday, the multi-lateral agency said Asian countries will be the key drivers of the world economy, accounting for more than 60 per cent of global growth. Interestingly, three-quarters of this comes from China and India alone.
While in India, growth will rebound to 7.4 per cent in FY19, China is projected to grow at 6.6 per cent this fiscal and will moderate to 6.4 per cent next year. The report also explores why inflation has been lying low, which it attributes to temporary global factors, including commodity prices and imported inflation as the key drivers. However, these factors could reverse, and inflation could rise.
According to IMF, inflation has become more backward-looking, meaning that past inflation drives current inflation more than future expectations, suggesting that if inflation rises, it may persist.
“Further, there is some evidence that the sensitivity of inflation to economic slackening has decreased (i.e., the Phillips curve has flattened), suggesting that if inflation rises, there may be a large hit to output when reducing it,” it said.