New Delhi: The World Bank on Monday raised its growth forecast for India in 2009-10 to 5.1% from its earlier projection of 4%, even as it gave a more pessimistic outlook for global growth.
In the report Global Development Finance 2009: Charting a global recovery, the World Bank said the negative impacts of the economic crisis in India may begin to “unwind” in 2010 and 2011, given the region’s strong underlying growth dynamics. It expects India to grow at 8% in 2010-11 and at 8.5% the following year.
The world’s gross domestic product (GDP), however, may shrink by 2.9% and global trade is expected to plunge by 9.7% in 2009, the World Bank said. In March, it had predicted a 1.7% global contraction.
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On the outlook for India and South Asia, the bank said: “The relatively rapid recovery in regional activity to close to potential output growth comes despite the weak recovery projected elsewhere and reflects the lagged impact of recent monetary policy easing—with some potential for further interest rate cuts.”
The bank said a stable government at the centre and its reform agenda has improved investor sentiment and could yield an even stronger recovery in investment demand.
Foreign direct investment (FDI) inflows into India fell from 4.6% of gross domestic investment in the third quarter of 2008 to 0.7% in the fourth quarter as result of the downturn, the report said.
Remittances, which account for 3% of India’s foreign exchange inflows, may deteriorate in 2009, it added. In dollar terms, India received $27 billion (Rs1.3 trillion) in remittance inflows in 2007, the highest among developing countries.
Fiscal stimulus measures, the World Bank said, should however provide a boost to household income and spending, though there is limited space for further stimulus.
In 2008-09, the fiscal stimulus provided by India amounted to about 3.5% of India’s GDP. “As a consequence, the public sector deficit is projected to have increased from 5.8% of GDP (gross domestic product) in 2007 to 9.8% in 2008 and to over 12% as of early-2009,” the bank said.
The bank said large fiscal deficits may lead to cuts in development spending and may put a threat to long-term growth prospects by crowding out private investment and leading to higher interest rates. “Growing public sector obligations are also likely to translate into increased debt ratios, raising the risk of default,” the World Bank said. Central government debt represents close to 55% of India’s GDP, the report said.