The Indian economy is recovering but remains well below its potential level of output. This may require fiscal policy to remain accommodative while monetary policy keeps a close eye on inflation, said Gita Gopinath, first managing director at the International Monetary Fund, in an interview with BloombergQuint.
The IMF released its World Economic Outlook on Tuesday and cut its global growth forecast by 0.5 percentage points to 4.4%. It cuts India's growth forecast by 0.5 percentage points to 9% for the current financial year. It raised the growth projection for next fiscal year by a similar amount to 9%.
"We have a small downgrade to growth for this year because of Omicron and its concentration in the first quarter of this calendar year," Gopinath said. "That postpones the recovery a bit, which is why the number for next fiscal goes up."
The Indian economy has been recovering but there's still quite a bit of gap between where it's right now and its potential in terms of the level of output that could have. There is underlying momentum where we should continue to see a recovery in consumption and investment. It's a gradual recovery compared to pre-pandemic trend.Gita Gopinath, First Managing Director, IMF
However, India, like other countries, could face challenges from the difficult environment globally and locally, rising energy prices and higher interest rates. On the positive side, better than expected conditions in the financial sector could help the economy.
Commenting on room for fiscal support to the economy, Gopinath said there is room for fiscal policy to stay accommodative a bit longer.
In terms of where the budget should go, there's certainly one piece that should address the very unequal recovery within the economy.Gita Gopinath, First Managing Director, IMF
The rural jobs guarantee scheme should be a priority for budget allocation, said Gopinath. One could consider providing free food staples for somewhat longer rather than letting it expire in March, she said. "The other big area where attention is required is spending on health, on education because schools have been shut for a long time and there is a big impact there."
In addition, the government ought to continue spending on public infrastructure investment, alongside its asset monetisation programme.
All of this should be done while communicating a credible medium-term fiscal framework on how deficits would be brought down. That would be required to ensure that financing costs for India remain well behaved in this environment where we are moving towards interest rates going up in major economies.Gita Gopinath, First Managing Director, IMF
While fiscal policy has to remain supportive, monetary policy will need to remain watchful of inflation pressures, said Gopinath, adding that the central bank needs to communicate the interest rate path more clearly.
"Inflation has been close to the upper band and core inflation has been pretty sticky close to the upper end of the RBI's tolerance band. While it's not substantially above that, this is something to keep an eye on," said Gopinath. "There is slack in the economy, that gives you pause to say they are still waiting for a recovery. At the same time, these things can change pretty quickly."
A long period of inflation stuck at a particular number can shift expectations up. So it is something to pay attention to. It would be helpful if the RBI, which has been communicating strongly, would communicate some more on the interest rate path, specially in this global environment when the U.S. Federal Reserve is going to start tightening.Gita Gopinath, First Managing Director, IMF
Watch the full interview below:
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