New Delhi: The World Bank on Wednesday kept India’s growth projection unchanged at 7.3% for 2018-19 and 7.5% in 2019-20 even as it warned that if a trade war between the US and China leads to a global slowdown, the spillover effects on emerging market and developing economies (EMDEs) could be profound.

This comes in the wake of the Central Statistics Office on Monday projecting the Indian economy to grow at 7.2% in 2018-19 against 6.7% a year ago.

It is of paramount importance for EMDEs to “rebuild policy buffers" while laying a stronger foundation for future growth by boosting human capital, promoting trade integration, and addressing the challenges associated with informality, the World Bank said in its latest Global Economic Prospects report titled “Darkening Skies".

India’s growth has accelerated, driven by an upswing in consumption, and strengthening of investment growth amid harmonization of the goods and services tax rates, though rising interest rates and currency volatility are weighing on activity, the World Bank said.

“Private consumption is projected to remain robust and investment growth is expected to continue as the benefits of recent policy reforms begin to materialize and credit rebounds. Strong domestic demand is envisioned to widen the current account deficit to 2.6% of GDP next year. Inflation is projected to rise somewhat above the midpoint of the Reserve Bank of India’s target range of 2-6%, mainly owing to energy and food prices," it said.

Public sector banks in India, which represent roughly 70% of the banking sector assets, still report low profitability and high non-performing assets, the World Bank said. “Credit expansion could be limited in some major South Asia economies unless further steps are taken to deal with financial and corporate balance sheets," it said.

The Bank, which also reduced China’s growth from the June projections by 10 basis points to 6%, pared down global growth by 10 basis points to 2.9% in 2019.

Global growth is moderating as the recovery in trade and manufacturing activity loses steam. Despite ongoing negotiations, trade tensions among major economies remain elevated. These tensions, combined with concerns about softening global growth prospects, have weighed on investor sentiment and contributed to declines in global equity prices," it said.

Growth in the US will continue to be supported by fiscal stimulus in the near term, which will likely lead to larger and more persistent fiscal deficits, the Bank said. “Though the probability of a recession in the United States is still low and the slowdown in China is projected to be gradual, markedly weaker-than-expected activity in the world’s two largest economies could have a severe impact on global economic prospects," it said.

The Bank warned that the projected gradual deceleration of global economic activity over the forecast horizon could be more severe than expected given the predominance of substantial downside risks. “A sharper-than-expected tightening of global financing conditions, or a renewed rapid appreciation of the US dollar, could exert further downward pressure on activity in EMDEs, including in those with large current account deficits financed by portfolio and bank flows," it said.

Escalating trade tensions are another major downside risk to the global outlook, the Bank said. “If all tariffs under consideration were implemented, they would affect about 5% of global trade flows and could dampen growth in the economies involved, leading to negative global spillovers," it said.

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