The International Monetary Fund has sent out a stark warning about India’s economy, which is experiencing a significant economic slowdown. The Indian economy has boasted one of the fastest growth rates in the world, so much so that it has been an important driver of global growth. What’s behind the downturn of the ‘Indian miracle’?
According to the IMF, the economy has suffered from a decline in consumption and investment, which has led to less tax revenue for the government. In October, the IMF sharply reduced its growth forecast for 2019, from 6.1% to just 5.0 percent. The downturn is even more severe when we focus at the third quarter of 2019 – on an annualized basis, growth fell to 4.5%, compared to 7% in Q3 of 2018.
With the economy slowing down, the Indian government may be tempted to embark on public spending projects, but this will only increase the country’s debt load. This approach is clearly anathema to the IMF, which recently sounded the alarm over the heavy debts of emerging market nations – debts which could become unsustainable and trigger a financial crisis if interest rates were to rise. Rather, the IMF has urged India to reduce its debt: “Economic development projects and enhanced social initiatives in India will be vital in the coming years,” the IMF said in a recent statement. “But to generate the revenue needed to get them off the ground, India’s debt – among the highest in emerging markets – must be reduced.”
According to Gita Gopinath, chief economist at the IMF, the Reserve Bank of India should continue to reduce interest rates in order to stimulate the economy. The bank has already cut trimmed rates five times this year, and Gopinath says there is more room for rate-cutting.
As the year 2019 fades into the sunset, Indian policymakers will have to make some tough decisions in order to re-energize the economy in 2020.
This article was originally posted on FX Empire
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