The International Monetary Fund (IMF) forecast economic growth for India to dip to 4.25% in the year to 31 March in its World Economic Outlook released on Tuesday, saying the economy would continue to underperform because of regulatory, infrastructural, and financing issues.

IMF also cut its estimate for global economic growth for the year to 31 December to 2.9% from the 3.1% it projected in July, largely because of deterioration of the economic prospects of emerging markets such as India and, to a lesser extent, China.

The two sets of numbers aren’t comparable because the Indian numbers are for gross domestic product at factor cost, which is what India’s government and economists prefer. The global numbers are at market price, which is what the Fund uses.

The multilateral agency expects the country’s growth to improve somewhat to 5% in the next fiscal year if exports strengthen and supply bottlenecks ease.

The 4.25% growth rate will be the lowest the Indian economy has grown at since 2002-03, when it expanded by 4%. Between 2004-05 and 2011-12, the economy expanded at an average of 8.3% every year.

The latest projection is less than the government’s estimate of GDP growth of 5-5.5%. IMF said robust farm production will be offset by an anaemic performance by the manufacturing and services sectors, and that the current monetary tightening will crimp domestic demand.

The finance ministry, in a quarterly review of the economy for the April-June period posted on its website, said current macroeconomic trends indicate that a combination of global and domestic developments is likely to result in a “shallow U" shaped recovery in 2013-14.

“Further, various high frequency indicators from the industrial sector such as industrial production, manufacturing PMI (Purchasing Managers’ Index) and auto sales suggest that the sluggish trend in the industrial sector is likely to continue for some more time. IIP (Index of Industrial Production) based in-house forecast shows moderation in industrial output till October 2013 and modest recovery thereafter," it added.

India’s economy grew by 4.4% in the three months ended 30 June, its slowest quarterly pace in four years. In 2012-13, economic growth at 5% was the slowest in a decade.

At market price, India’s economy will expand slower than that of sub-Saharan Africa. IMF shaved its 2013 GDP growth projection for India to 3.8% in terms of market price from 5.6% estimated in July.

The Asian Development Bank on 2 October slashed its growth forecast for India to 4.7% for 2013-14 from 6%. It expects economic growth in India to pick up in 2014-15 to 5.7%, down from the 6.5% projected earlier.

IMF said emerging market and developing economy growth rates are now down some three percentage points from 2010, with Brazil, China and India accounting for about two-thirds of the decline.

“Together with recent forecast disappointments, this growth decline has prompted further downgrades to medium-term output projections for emerging market economies," IMF said.

The Fund said these reductions in potential growth point to some serious structural impediments.

“For example, India’s potential has been undermined by supply bottlenecks arising from problems in the regulatory framework for mining, energy, telecommunications and other sectors; a consequent slowdown in permits and project approvals; and overstretched corporate balance sheets," it said. The current pressure on the economy has “put further premium" on fiscal consolidation and implementing structural reforms, the Fund added.

However, IMF reasoned that the current slowdown in India’s growth is a result of unwinding of earlier positive cyclical factors and should not be construed as permanent fall in the longer-term, steady-state growth rate.

India’s growth in 2018-19 will bounce back to 6.7%, which is the average of the past 15 years’ growth (1998-2013), it said.

IMF’s projection of growth of 6.7% by 2018-19 also means India’s potential growth rate is not 8-9%, according to D.K. Joshi, chief economist at Crisil Ltd, the credit rating agency.

“It is a pessimistic forecast," Joshi said. “It also means the phase of high growth rate from 2003-04 to 2007-08 was a blip."

However, if the government takes the right policy actions, growth could surprise on the upper side in the medium term, Joshi said.

The outlook in emerging Asia, including India, remains robust over the medium term, anchored by the steady rise in domestic demand, according to an economic forecast for southeast Asia, China and India released on Tuesday by the Organisation for Economic Co-operation and Development (OECD), a grouping of rich nations.

Although emerging Asia has made remarkable economic progress over the past four decades, some of the middle-income developing economies face difficult challenges to sustain their long-term growth and move beyond the middle-income trap, Mario Pezzini, director of the OECD Development Centre, said in a statement. “In the best scenario, if fundamental changes are applied, China and Thailand could become high-income countries within 20 years," Pezzini said. “On the other hand, Vietnam and India will need more than 40 years to reach the high-income group."

IMF said that in a number of economies, including Brazil, India and Indonesia, more monetary tightening may well be needed to address continued inflationary pressure from capacity constraints, which will likely be reinforced by recent currency depreciation. Since January, the rupee has weakened about 11% against the dollar and has lost the second most after Indonesian rupiah in Asia.

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