New Delhi: The Indian economy will grow at 7.2% in 2018 and accelerate to 7.4% in the following year as a result of robust private consumption, public investment and structural reforms, but it still faces the risk of sudden capital withdrawal on account of monetary policy normalization in developed countries, a United Nations report said.
“Despite the slowdown observed in early 2017 and the lingering effects from the demonetisation policy, the outlook for India remains largely positive, underpinned by robust private consumption and public investment as well as ongoing structural reforms," the United Nations World Economic Situation and Prospects 2018 report released on Monday said. At the global level, growth is expected to remain steady at 3% in 2018 and 2019, it said.
The report also forecast that inflation in India will be 4.5% in 2018 and 4.8% in 2019, slightly above the Reserve Bank of India’s (RBI) medium-term consumer price index-based (CPI-based) inflation target of 4%. The central bank had in its 6 December monetary policy review had raised its fiscal second-half inflation estimate range marginally to 4.3-4.7%.
“Subdued inflation, coupled with a good monsoon season, offers scope for additional monetary easing. However, if inflation accelerates faster than anticipated, the loosening cycle could end abruptly," said the report.
In the latest review, RBI left its repurchase rate—the rate at which it infuses liquidity in the banking system—unchanged at 6%. The UN report listed sluggish private investment as a key macroeconomic concern for India.
Subdued credit growth, low capacity utilization in some industrial sectors and balance sheet problems in the banking and corporate sectors have been the problems faced by the Indian economy, while public investment in infrastructure has played a critical role in propping up overall investment growth.
The other challenge is a spike in risk aversion and sudden capital withdrawal that monetary policy normalization in developed economies could trigger.
“Central banks in developed economies are currently operating in largely unchartered territory, with no historical precedent as guidance. This makes any adjustment of financial markets less predictable than during previous recoveries and amplifies the risks associated with policy errors," said the report.
“Confidence in the Indian economy has increased substantially on account of the policy measures of the government and of the central bank," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy, a New Delhi-based think tank.