World Bank reduces India GDP growth forecast to 7% for 2017-18

New Delhi: After remaining the world’s fastest-growing region for eight consecutive quarters, South Asia has slipped to the third position behind East Asia and the Pacific regions, as India’s economy slowed to its lowest level in 13 quarters, the World Bank said on Monday.

This is at a time when other South Asian nations like Bangladesh and Nepal have registered strong economic growth.

In the June quarter of 2017-18, the Indian economy decelerated to 5.7%, lowest since the economy grew at 5.3% in the March quarter of 2013-14.

In its South Asia Economic Focus (Fall 2017), the World Bank reduced India’s GDP growth forecast to 7% for 2017-18 from 7.2% estimated earlier, blaming disruptions caused by demonetisation and the implementation of the goods and services tax (GST), while maintaining at the same time that the economy would claw back to grow at 7.4% by 2019-20.

Both the Asian Development Bank as well as the Organisation for Economic Cooperation and Development (OECD) have also cut their growth projections for India to 7% and 6.7%, respectively, for fiscal 2017-18.NextMAds

The World Bank said the unexpected slowdown in India’s growth story is because of the delayed consequence of demonetization, sharp decline in the growth rate of public expenditures and uncertainty created by the introduction of GST.

The multi-lateral lending agency said that because the main explanations offered for the slowdown of the last quarter refer to temporary shocks, the growth rate could be expected to bounce back.

“Moreover, the unusually low growth rate of the last quarter could also be affected by measurement error. In India, final growth rate figures often differ considerably from first estimates; on average they tend to be 0.5 percentage points higher. The combination of temporary shocks and measurement error suggests no need for a policy correction,” it added.thirdMAds

However, it cautioned that since economic growth has been slowing down for the last five consecutive quarters, there could be more reasons at play. “Over this period, imports increased sharply while private investment declined. Behind these trends lies a combination of large public sector borrowing (especially by the states), relatively sticky interest rates despite decreasing inflation, and an increasingly stressed financial sector,” it said, advising the government to appropriately adjust its “economic policy stance” without further elaboration.

The Bank said India’s growth is projected to increase gradually to 7.4% by 2019-20, underpinned by a recovery in private investments, which are expected to be crowded-in by the recent increase in public capex and an improvement in the investment climate (partly due to the passage of GST and Insolvency and Bankruptcy Code, and measures to attract foreign direct investment).

It projected inflation and external conditions to remain stable for next two years. “Two consecutive years of normal monsoon are expected to further stabilize prices and offset the increase in global oil prices. The rupee appreciated vis-à-vis the US dollar and is expected to remain resilient. The current account deficit is expected to remain below 2% of GDP and fully financed by FDI inflows,” it added.fourthMAds

The World Bank expects fiscal consolidation to continue, driven more by the centre than states. “The Union government adopted a neutral fiscal policy stance in FY2017, where most of the consolidation is predicated on privatization receipts. The implementation of GST may provide an additional impetus to revenue collections in the medium term. States’ fiscal deficit could rise in the near-term due to increasing pressures from contingent liabilities,” it added.

However, the World Bank cautioned that the most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments such as corporate debt overhang, regulatory and policy challenges, and the risk of an imminent increase in US interest rates.

“If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India’s potential growth. Downside risks to the global economy—and accordingly to export growth and capital flows—are also substantial given the possibility of monetary policy normalization in the USA and risks of protectionism,” it warned.