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Support Startups, Reduce Barriers: IMF's Formula For Sustained Growth

Discover how India aims to become the world's 3rd largest economy by 2027, IMF's growth forecasts, and the role of startups, structural reforms, and economic challenges. Dive into the Polit-eco story. Read on!

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Swati Dayal
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In its latest World Economic Outlook Report for 2023, the International Monetary Fund (IMF) has made some groundbreaking projections regarding the Indian economy. While the report foresees India's economy surpassing both Japan and Germany by 2027, it also highlights that India's per capita GDP in 2027 will be 9.1 percent of Japan's and 5.7 percent of Germany's.

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The report, shows the growth trajectory of the world economies. It also suggests some structural reforms for sustained growth of the economies. It recommends that reducing barriers to competition and supporting start-ups, to deepening digitalization would, enhance the productivities.

This revelation showcases India's remarkable economic growth but underscores the challenges it faces in achieving equitable wealth distribution.

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Commenting on the growth forecast of IMF, the Prime Minister, Narendra Modi said that India is a global bright spot, a powerhouse of growth and innovation. It is because of strength and skills of our people, Shri Modi said.

He has also reiterated commitment that we will continue to strengthen our journey towards a prosperous India, further boosting our reforms trajectory.

Prime Minister Modi, in a tweet, said, “Powered by the strength and skills of our people, India is a global bright spot, a powerhouse of growth and innovation. We will continue to strengthen our journey towards a prosperous India, further boosting our reforms trajectory.”

 

Powered by the strength and skills of our people, India is a global bright spot, a powerhouse of growth and innovation. We will continue to strengthen our journey towards a prosperous India, further boosting our reforms trajectory. https://t.co/CvHw4epjoZ

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— Narendra Modi (@narendramodi) October 10, 2023

India's Soaring Economic Prospects

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India's economic prowess is on an upward trajectory. As per the IMF's projections, India is already the third-largest economy in terms of purchasing power parity and the fifth-largest when measured in current US dollars. However, it is only a matter of time before it assumes the position of the third-largest economy in USD terms, surpassing Japan's GDP of USD 4.71 trillion with a projected GDP of USD 4.95 trillion by 2026.

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IMF Upgrades India's Growth Forecast

The IMF has recently revised its growth forecast for India in 2023, upgrading it to 6.3 percent. This adjustment aligns with its unchanged outlook for 2024 and is attributed to "stronger-than-expected consumption" observed in the April-June quarter. The IMF has consistently regarded India as one of the bright spots in the global economy, even amid a challenging global economic landscape. Moreover, the IMF anticipates that India's growth will outshine that of other developing economies, especially as global economic growth faces headwinds due to various factors, including Russia's prolonged war on Ukraine and the Israel-Hamas conflict.

"Growth in India is projected to remain strong, at 6.3 percent in both 2023 and 2024, with an upward revision of 0.2 percentage point for 2023, reflecting stronger-than-expected consumption during April-June," the report says.

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Meanwhile, IMF in its report also recommended certain structural reforms for sustained growths.

What Structural Reforms Does IMF Recommend for Sustained Growth?

The IMF's World Economic Outlook Report emphasizes the importance of structural reforms to sustain growth in a challenging economic environment. It suggests that countries must implement a careful sequence of first-generation reforms that focus on governance, business regulations, and the external sector. These initial reforms are instrumental in unlocking growth potential, making subsequent reforms, such as those related to credit markets and green transition, more effective.

Furthermore, the IMF encourages multilateral cooperation to ensure better growth outcomes for all nations. This cooperation involves adhering to World Trade Organization rules, safeguarding the flow of critical minerals essential for the climate transition, and working to limit geopolitical fragmentation that hinders progress toward common global goals.

Support for Start-Ups and Innovation Important

Among the structural reforms, the report highlights the importance of supporting startups and fostering innovation. By reducing barriers to competition and facilitating the growth of start-ups, economies can enhance productivity and accelerate growth. These reforms are vital not only for economic progress but also for addressing the potential short-term growth costs of ambitious green initiatives.

"More broadly, reforms ranging from enhancing human capital by expanding health care coverage and increasing access to early childhood and higher education, to reducing barriers to competition and supporting start-ups, to deepening digitalization would, depending on the economy in which they were enacted, enhance productivity. By accelerating growth, such reforms can also help assuage concerns about potential short-term growth costs of ambitious green reforms, including those that operate through energy," IMF says.

IMF Recommends Boosting Labor Supply and Preventing Debt Distress

In a bid to bolster economies and manage inflation, IMF has suggested a series of structural policy reforms. These reforms aim to enhance labor supply by reducing labor market tightness, encouraging participation, and decreasing job search and matching frictions. Measures include short-term training programs for professions with labor shortages and flexible labor laws that support telework and leave policies.

Furthermore, policies designed to increase the participation of women and older individuals in the workforce, reduce labor market duality, and improve mobility are seen as key contributors to bolstering labor supply. Active immigration policies in advanced economies are also recommended to address labor shortages and counter long-term growth headwinds, particularly stemming from an aging population.

Additionally, the IMF highlights the need to address the debt distress facing several emerging market economies and low-income nations due to substantial short-term external financing needs. The current strain is reflected in elevated sovereign spreads, which hinder access to credit for economies reliant on short-term borrowing.

To mitigate the risk of debt distress spreading, the IMF advocates for faster and more efficient coordination on debt resolution. This could be achieved through mechanisms such as the G20 Common Framework and the Global Sovereign Debt Roundtable. 

Challenges for China and the Global Economy

In contrast to India's positive outlook, the IMF has downgraded projections for China, revising its 2023 growth forecast from 5.2 percent to 5 percent and its 2024 forecast from 4.5 percent to 4.2 percent. Concerns surround China's real estate sector, which requires "forceful action" to regain investor confidence, according to IMF chief economist Pierre-Olivier Gourinchas. Among advanced economies, the United States has shown the strongest upward trend, with a projected growth rate of 2.1 percent for the current year, indicating signs of economic resilience.

By contrast, the Euro area faces a challenging economic landscape, with a forecasted growth rate of just 0.7 percent for this year and 1.2 percent for the next. The ongoing war in Ukraine has impacted energy prices, but the Euro area has demonstrated resilience in consumer spending and improved pandemic-related support for businesses.

Global Economic Outlook

The IMF, at its annual meeting in Morocco's Marrakesh, acknowledges the global economy's remarkable resilience in recovering from the Covid-19 pandemic and other global risks, including the cost-of-living crisis in several countries. However, the report also points out that global growth remains slow and uneven, leading to growing global divergences. The IMF's global growth estimate for this year is 3 percent, and the 2024 assessment has been revised to 2.9 percent, down 0.1 percent from the previous forecast in July.

India's economic ascension is on the horizon, and its growth forecasts are robust. However, the country must address the disparity in per capita GDP to ensure equitable wealth distribution. The IMF's emphasis on structural reforms, including support for start-ups and innovation, highlights the critical role of these reforms in sustaining economic growth in a challenging global landscape. As the world grapples with various economic challenges, multilateral cooperation and adherence to global trade rules remain vital for fostering shared global prosperity.

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