Lima, Peru: The International Monetary Fund (IMF) on Tuesday marginally lowered its 2015-16 growth forecast for India, which will still remain the world’s fastest growing major economy, and expressed optimism about its future prospects.

IMF now expects the Indian economy to grow 7.3% this year, lower than the 7.5% it projected in July. It expects growth to accelerate to 7.5% the following year.

That will cement India’s position as the fastest growing major economy, ahead of China, which the IMF expects will grow 6.8% this year, followed by 6.3% in the next.

IMF also lowered its global growth forecast by 0.2 percentage points to 3.1%, citing an uneven recovery as well as increasing downside risks to the growth outlook for emerging market economies that are grappling with declining commodity prices, depreciating currencies and growing volatility in financial markets.

The Washington-based multilateral institution attributed the lowering of India’s growth forecast to the weakening of global external demand and the consequent impact on Indian exports.

“India is not as open as China but when external demand weakens, it will impact Indian exports. Though domestic demand remains resilient, global developments are going to have an impact on India," Gian Maria Milesi-Ferretti, deputy director of the research department at IMF, said at a press conference.

Indian exports contracted for the ninth consecutive month in August falling 20.7% to $21.2 billion in the month.

Still, falling commodity prices will help India because it is a net commodity importer and also in controlling inflation, Milesi-Ferreti said.

In its bi-annual World Economic Outlook, the release of which coincided with IMF’s annual meetings in the Peruvian capital Lima, the multilateral agency said India’s economy will also benefit from the “recent policy reforms, (and) a consequent pick-up in investment".

It also said a sharp fall in inflation, on account of lower oil and agricultural commodity prices, has created space for further monetary policy easing but warned of upside risks to inflation. Retail inflation eased to 3.66% in August from a revised 3.69% a month ago.

“In India, near-term growth prospects remain favorable, and the decrease in the current account deficit has lowered external vulnerabilities. The faster-than-expected decline in inflation has created space for considering modest cuts in the nominal policy rate, but the real policy rate needs to remain tight for inflation to decline to the inflation target in the medium term, given upside risks to inflation," it said.

On 29 September, the Reserve Bank of India cut key policy rates by 50 basis points to 6.75%, higher than an expected 25 basis points. One basis point is one-hundredth of a percentage point.

The central bank expects consumer price inflation to be 6% in January 2016; it is aiming to curb the rate to within 4% by January the following year. IMF said that India’s consumer price inflation will be at 5.4% in 2015-16 but will increase marginally to 5.5% in 2016-17.

The IMF report said that although continuing fiscal consolidation is essential, it should be more growth-friendly and therefore led by tax reforms and a reduction in subsidies. India will also need to undertake structural reforms in education and labour to improve the country’s competitiveness and increase productivity, it said.

Easing long-standing supply constraints in the energy, mining and power sectors, transitioning to market-based pricing of natural resources to boost investment, addressing delays in the implementation of infrastructure projects and improving policy frameworks in the power and mining sectors should be the priorities of the new government, the report said.

With balance sheets of corporate entities and banking sectors visibly under strain, the report also stressed the need for enhancing financial sector regulations, increasing provisioning and strengthening debt recovery practices.

At the global level, how China fares in its rebalancing effort to become a consumption-driven economy from an investment-led one and the normalization of US policy rates loom as key uncertainties in the next few months, IMF said.

IMF’s marginally lower growth projection for India was preceded by similar revisions by other multilateral agencies as well.

Last month, the Asian Development Bank lowered India’s growth forecast by 0.4 percentage point to 7.4%, owing to the economic slowdown in industrial countries, a weak monsoon and stalled action on key structural reforms.

Moody’s Investors Service, too, lowered its growth estimates for India by half a percentage point to 7% for 2015-16, while Singapore-based commercial bank DBS Group Holdings Ltd reduced its estimate to 7.4% from 7.6% for the same period.

The World Bank is the only agency which has so far not lowered India’s growth forecast. The multilateral lending agency expects India to grow at 7.5% in 2015.

The Indian government remains upbeat about India’s growth prospects. At a press conference earlier this week, Shaktikanta Das, secretary, department of economic affairs, said the government expected economic growth to exceed 7.5% in the current fiscal year.

Remya Nair is in Lima, Peru, on the invitation of the IMF as a part of its journalism fellowship programme.

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