New Delhi: The International Monetary Fund (IMF) on Thursday said that the slowdown in the Indian economy was largely due to internal and not external factors, punching a hole in the oft-repeated claim of the government that global factors beyond its control were to blame.

It also cautioned that growth would decline further if the drag caused by internal factors in some emerging market economies since 2012 is not addressed.

The fund, in a chapter of its World Economic Outlook titled On the Receiving End? External Conditions and Emerging Market Growth Before, During, and After the Global Financial Crisis, said the slowing growth in some emerging market economies since 2012 can be attributed largely to internal factors. “External factors have generally been much less important compared with internal factors for some relatively large or closed economies, such as China, India, and Indonesia," it said.

According to IMF, internal factors began to act as a drag on India’s growth in early 2008, likely as the result of stress from growing bottlenecks in infrastructure after a period of rapid growth. “Their negative incidence continued until mid-2009," it said.

Once again, internal factors started posing a drag beginning 2011 and lasted till the quarter that ended on 31 December 2012, the fund added.

In contrast, it said the sharp dip in growth in Brazil and Indonesia during the global financial crisis was almost entirely driven by external factors.

“In Russia and South Africa, external factors dominated growth dynamics during the global financial crisis, but internal factors also played a role, possibly reflecting problems related to domestic overheating," it added.

In India, the high cost of borrowing and delays in securing mandatory government approvals have stalled corporate investments, while high inflation and slower hiring have shaken consumer confidence and forced households to reduce consumption expenditure.

Samiran Chakraborty, regional head of research, South Asia, at Standard Chartered Bank, said IMF had corroborated what most analysts have been saying all along. “The decline of India’s growth rate from near 10% to less than 5% cannot be entirely attributed to external factors. In fact, in last couple of quarters, we could have seen lower GDP (gross domestic product) prints without the buoyancy in merchandise exports, implying positive play of external factors on economic growth."

IMF will release its global growth projections, including that for India, on 8 April.

The Asian Development Bank (ADB) on Tuesday reduced India’s growth forecast for 2014-15 to 5.5% from its December estimate of 5.7% on the back of a sharper-than-expected industrial slowdown. In 2015-16, economic growth is expected to improve to 6%, as a revival in advanced economies bolsters external demand and government action counters some structural bottlenecks that have impeded industry and investment.

In its Asian Development Outlook, the Manila-based multilateral lending agency said the Indian economy has bottomed out in the last fiscal year. It added that the economy would not reach its potential until the remaining structural bottlenecks are overcome.

“Weaknesses remain, however, and include persistent inflation, fiscal imbalances, bottlenecks to investment, and inefficiencies that require structural reforms," ADB said. “Without a systemic resolution to these, growth is forecast to pick up modestly."

The latest analysis by IMF says that China is an important contributor to growth for emerging market economies including India. “For Argentina, Brazil, Colombia, India, Indonesia, Thailand, and Venezuela, the growth correlation with China’s growth is stronger than that with the Euro area or the United States." India, for instance, has a positive growth correlation of 0.66 with China.

The fund said China’s strong expansion provided emerging markets with an important buffer during the global financial crisis and its recent slowdown has also softened growth in emerging market economies. “Specifically, of the 2 percentage point decline in average emerging market economy growth since 2012 compared with 2010–11, China has accounted for close to 0.5 percentage point, other external factors for 1.25 percentage points, and other, mostly internal, factors for the remaining 0.25 percentage point," it added.

However, the fund said that the relatively high impact elasticity of India’s growth to US growth could reflect the fact that the Indian economy is more closely integrated with that of the US than is implied by a measure of integration based on the share of India’s trade with advanced economies, notably through its sizable service sector exports such as outsourcing.

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