India will overtake China as the fastest growing emerging economy in 2015-16 by clocking a growth rate of 7.5 per cent on the back of recent policy initiatives, pick-up in investments and lower oil prices, the International Monetary Fund (IMF) said on Tuesday.
"India’s growth is expected to strengthen from 7.2 per cent in 2014 to 7.5 per cent in 2015. Growth will benefit from recent policy reforms, a consequent pick-up in investment, and lower oil prices," the IMF said in its latest World Economic Outlook.
China will witness a deceleration with growth rate sliding from 7.4 per cent in 2014 to 6.8 per cent in 2015 and 6.3 per cent a year after, it added.
IMF's growth projection of India, however, is lower than the estimates of the Finance Ministry and the RBI. The Finance Ministry expects GDP growth to be 8-8.5 per cent in 2015-16, while the Reserve Bank of India (RBI) has estimated it at 7.8 per cent.
The report, released at IMF headquarters on the sidelines of the annual meeting of the IMF and the World Bank, said lower oil prices will raise real disposable incomes, particularly among poorer households, and help drive down inflation.
"The early evidence suggests that in oil importers, from the United States, to the euro area, to China, and to India, the increase in real income is increasing spending.
"Oil exporters have cut spending but to a smaller extent: many have substantial financial reserves and are in a position to reduce spending slowly," Olivier Blanchard of the IMF said.
In 2015 World Economic Outlook, the IMF has improved India's growth prospects for the current fiscal as well as next fiscal by 1.2 per cent and 1 per cent over its January projection.
The upward projection for India by IMF comes at a time when other economies are not likely to show improvement in economic performance.
According to the report, global growth remains moderate, with uneven prospects across the main countries and regions.
"We forecast global growth to be roughly the same this year than last year, 3.5 percent versus 3.4 percent," said Olivier Blanchard of the IMF in a news conference.
"This global number reflects an increase in growth in advanced economies, 2.4 per cent versus 1.8 per cent, offset by a decrease in growth in emerging market and developing economies, 4.3 per cent versus 4.6 per cent last year," he said.
Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries, the IMF report said.
IMF Managing Director Christine Lagarde had last month described India as a 'growth bright spot'.
"Forecasts for most emerging and developing economies are slightly worse than last year...(but) India is a growth bright spot," she had said during her visit to the country.
As regards the inflation, the IMF report said lower oil prices will raise the real disposable incomes, particularly among poorer households, and help drive down inflation.
It has projected a retail inflation of 6.1 per cent in 2015-16 and 5.7 per cent in 2016-17 for India.
Referring to the structural reforms, the IMF said, India should endeavour to remove infrastructure bottlenecks in the power sector and implement education, labour and product markets reforms to raise competitiveness and productivity.
"In India, the post election recovery of confidence and lower oil prices offer an opportunity to pursue such structural reforms," it said.
On the Current Account Deficit (CAD), the report said, it would improve to 1.3 per cent in current fiscal from 1.4 per cent a year ago. However, it may worsen to 1.6 per cent in 2016-17.
Blanchard said the exchange rate movements have been unusually large. Among major currencies, the dollar has seen a major appreciation, and the euro and the yen a major depreciation.
These movements clearly reflect differences in monetary policy, with the United States expecting to exit the zero lower bound this year, but with no such prospects for the euro area or Japan.
To some extent, the United States has the policy room to offset the adverse effects of the dollar appreciation.
According to the report, growth outlook for emerging markets primarily reflects more subdued prospects for some large emerging market economies as well as weaker activity in some major oil exporters because of the sharp drop in oil prices.
Growth in emerging markets is expected to pick up in 2016, driving an increase in global growth to 3.8 percent, mostly reflecting some waning of downward pressures on activity in countries and regions with weak growth in 2015, such as Russia, Brazil, and the rest of Latin America.
