Exuding confidence in India’s structural reforms as well as its demographic dividend, the IMF has posited India as the world’s growth engine for the next 30 years. It has projected a medium-term growth rate of 7.75 per cent on the back of “macro-financial and structural policies...to help boost inclusive growth.” The GST and the insolvency code are rightly expected to go a long way in lifting India’s productivity. Hence, the IMF has projected an uptick in investment activity to 32.2 per cent of GDP in 2018-19 and 2019-20, against 30.6 per cent in 2017-18. With China growing at below 7 per cent and now locked in a trade war with the US, India looks like the forerunner among emerging markets.
However, there are some macroeconomic worries. The current account deficit (CAD), or the savings-investment gap, is estimated at 2.6 per cent this fiscal and 2.2 per cent in the next “on rising oil prices and strong demand for imports offset by a slight increase in remittances.” The Fund suggests that public dissavings should be curtailed to curb the CAD. In this situation, the reliance on FDI and portfolio flows cannot be underestimated. Whether a rising CAD can create situations of volatility on the external account is a moot point. Surprisingly, the IMF has projected a 13.2 per cent increase in exports this year and 10.1 per cent the next, perhaps banking on a falling rupee to do the trick even in this climate of protectionism. A projected headline inflation of 5.2 per cent in 2018-19 is way above the Reserve Bank’s comfort level, with the IMF hoping for a prudent fiscal policy to keep it in check. It is not clear whether a tight fiscal and monetary policy will choke growth. While some of the Fund’s prescriptions make sense, such as reducing trade documentation requirements, lowering tariffs and generally improving governance, there are inconsistencies in its narrative.
It is not clear on what basis the IMF is banking on an improvement in investment, which has dipped from 34.2 per cent of GDP in 2014-15 to 30.6 per cent now. Despite supply-side reforms, which have pushed India up several notches in the ‘ease of doing business index’, investment needs a demand stimulus. There isn’t convincing evidence of any surge in demand in agriculture, industry and services. The Fund-Bank combine tends to view India as a counterpoint to China — as a market reformer and a country with credible democratic institutions. However, an area of acute concern is India’s poor socio-economic indicators, affecting both labour productivity and technological upgradation. Its poverty levels, life expectancy and levels of education are an embarrassment for its levels of growth. For the demographic dividend — 66 per cent of the population between the ages of 15 and 64 — to translate into productivity gains, education levels and skilling programmes need to improve significantly.