Aided by lower oil prices and a limited exposure to the global financial turmoil, India is set to grow at 7.5 per cent this year and 7.8 per cent in 2016, the World Bank has projected in its latest report. The bank, however, has downgraded China’s growth to 6.9% as against 7.1% predicted earlier. The Asian giant, China, is headed for its slowest growth in a quarter of a century.
The report, however, cautions India against delays in adoption and implementation of key reforms that could affect investor sentiment. A weak trade performance and financial sector vulnerabilities
could also hold back GDP growth, it says.
Calling India “resilient”, the report says the Indian economy, lifted by the prospects of implementation of reforms and a favourable terms-of-trade shock, has remained on a path of modest acceleration as reflected in improvements in investments and industrial output.
The report, issued just ahead of the IMF-WB meetings in lima, goes on to say that India is expected to spur South Asia in maintaining its lead as the world’s fastest-growing region in the world.
For South Asia as a whole, the Bank has projected a 7 per cent growth this year and 7.14 per cent next year.
“This positive performance hinges on solid growth in services, domestic consumption, and a gradual rise of investments. limited exposure to the financial turmoil and an improved external position has given most South Asian countries important policy space,” the Bank says in its biannual South Asia Economic Focus.
It highlights the fact that India and much of South Asia stand out as a region with moderate exposure and limited external vulnerability in the face of international turmoil. “The region is more inward oriented than others, and its growth is less dependent on global markets,” it said, adding, “With the exception of Pakistan, the share of exports to China is low, meaning that the region is not directly vulnerable to the Chinese economic slowdown.”
The Bank sees a robust economic recovery in India, with growth increasing from 5.1 per cent in 2012-13 to 7.3 per cent in 2014-15 before moderating slightly to 7.0 per cent in the first quarter of 2015-16.
While the momentum was initially supported by private consumption, it has more recently benefited from a pick-up in investments that rose to 4.6 per cent in 2014-15 and 4.9 per cent in the first quarter of current fiscal, when compared to an average of a mere 1.3 per cent in the preceding two years.
Inflationary pressures that subsided during 2014-15 with retail inflation down to 5.9 per cent from an average of 10.1 per cent in the preceding two years have more recently been stable at 4.5 per cent for the first five months of the current fiscal, the report notes.
Discussing the challenges facing India, the Bank reckons the most immediate downward risk relates to corporate and financial sector balance sheets, while the longer-term risks revolve round the implementation of the reform agenda dealing with GST, land acquisition and improvements in the business climate, some of which have been delayed.
“Unblocking the pipeline of infrastructure projects, ensuring sustainable means of financing and unlocking private investment are necessary to realise the meaningful and sustainable increase in investments embodied in the baseline scenario,” it says.
On the external front, the report notes that major risks stem from weak growth of India’s key sources of trade, investment and remittance flows, increased volatility in financial flows and higher global food prices due the severe El Nino expected this year.
Commenting on implementation of the 14th Finance Commission’s recommendations, the Bank notes that while increased devolution of unconditional resources is a positive development, efficient utilisation of these resources may vary across States, adding, “A simultaneous scaling down of centrally sponsored social sector schemes presents risks for development outcomes, unless compensated for by the States.”