India’s chief financial advisor on IMF progress downgrade

Traffic jam on Delhi-Meerut Expressway, on July 29, 2021 in Ghaziabad, India.

Sakib Ali | Hindustan Times | Getty Images

India’s chief economic advisor Krishnamurthy Subramanian hit back at the International Monetary Fund for downgrading the country’s growth projection, saying it’s “significantly off the mark.”

The IMF last week cut India’s growth outlook to 9.5% for the fiscal year ending in March 2022 — that’s 3% lower than its April forecast of 12.5%. In an accompanying report, the IMF said India’s prospects were downgraded following a severe second wave of Covid-19 outbreak and an “expected slow recovery in confidence from that setback.”

Speaking to CNBC’s “Street Signs Asia” on Monday, Subramanian claimed the IMF’s assessment was driven by “saliency bias” — where more focus is given to striking information while data that is comparatively less remarkable is ignored. He said India did not agree with the downgrade.

“Our projections were not as high as theirs, nor do we think that the revision is warranted,” Subramanian said about the size of the 3% downgrade. “I would say IMF is significantly off the mark.”

The Indian government’s expectations are more in line with the Reserve Bank of India, which revised down its projected growth rate by 1% to 9.5% in June, he added.

To be clear, both the RBI and the IMF now have the same growth projection for India — the fund previously had a higher projection rate of 12.5% growth compared to the central bank’s 10.5%.

Impact of India’s second wave

The economic impact of the second wave is unlikely to be as large as the first, according to Subramanian.

He cited three reasons for that assessment: First, the duration of the second wave was comparatively shorter than the previous outbreak.

Cases rose to record levels between late March and early May during the second wave — in the first wave, daily infections climbed from mid-June last year and peaked in September. Still, the total reported cases everyday during the second wave was significantly higher than the first wave.

Second, most of the Covid-related lockdowns were carried out at the state level, unlike in the first wave last year where India shut down most of the country for several months.

The lockdowns this year “were asynchronous in time and heterogenous in their intensity,” Subramanian said. He added that neither essential goods and nor inter-state movements were as heavily affected, which is likely to reduce the economic impact further.

For the fiscal year that ended on March 31, India’s economy contracted by 7.3%.

In a virtual industry conference last month, Subramanian reportedly said he expected India to grow between 6.5% to 7% from fiscal 2023 onwards.

Some economists say there are already early signs of improvement in economic activity as restrictions were eased once the second wave of cases peaked in early May.

Kunal Kundu from Societe Generale, however, cautioned in a note last week that the green shoots emerging in India are “still patchy at this stage.” With recovery not yet in full momentum, and a looming third wave of infection in the horizon, India’s growth trajectory needs to be “carefully nurtured,” Kundu said.

Inflation will be range-bound

Rising prices are a growing worry in many countries. If inflation becomes persistent, it may force central banks to curb their ultra-loose monetary policies, such as through raising interest rates.

India’s retail inflation for June rose 6.26% year-on-year while prices in May increased by 6.3% — the numbers were above the RBI’s inflation target range of 2% to 6%.

But, Subramanian said he expects inflation to become range-bound.

“I do expect it to be between the 5% to 6% range because the restrictions that were imposed due to the second wave did have some supply side impact and that’s why the prints have come for two months above 6%,” he said. Prices have moderated on a month-on-month basis, he added.