WB cuts growth fore­cast

After IMF, World Bank points to de­mon­eti­sa­tion, GST for low­er­ing pro­jected eco­nomic ex­pan­sion

Financial Chronicle - - FRONT PAGE - LALIT K JHA

IN­DIA’S gross do­mes­tic prod­uct (GDP) may slow from 8.6 per cent in 2015 to 7 per cent in 2017 be­cause of dis­rup­tions by de­mon­eti­sa­tion and the GST, the World Bank has fore­cast and warned that sub­dued pri­vate in­vest­ment due to in­ter­nal bot­tle­necks could put down­side pres­sures on the coun­try’s po­ten­tial growth.

The In­ter­na­tional Mone­tary Fund (IMF) on Tues­day also low­ered In­dia’s growth pro­jec­tion to 6.7 per cent in 2017, 0.5 per­cent­age points less than its pre­vi­ous two fore­casts and slower than China’s 6.8 per cent.

In­dia’s eco­nomic mo­men­tum has been af­fected by dis­rup­tions from the with­drawal of ban­knotes and un­cer­tain­ties around the goods and ser­vices tax (GST), the World Bank said in its South Asia Eco­nomic Fo­cus, a bian­nual eco­nomic up­date. As a re­sult, growth is ex­pected to slow from 8.6 per cent in 2015 to 7 per cent in 2017. Sound poli­cies around bal­anc­ing public spend­ing with pri­vate in­vest­ment could ac­cel­er­ate growth to 7.3 per cent by 2018, it said.

While sus­tained growth is ex­pected to trans­late to con­tin­ued poverty re­duc­tion, more fo­cus could be made to help ben­e­fit the in­for­mal econ­omy more, said the re­port re­leased here ahead of the an­nual meet­ing of IMF and the World Bank.

A slow­down in In­dia’s growth rate, the bank said, has also af­fected the growth rate of South Asia. As a re­sult, South Asia has fallen to sec­ond place after East Asia and the Pa­cific. “Real GDP growth slowed to 7.1 per cent in 2016, from 8 per cent in FY16, and fur­ther to 5.7 per cent in Q1FY17,” it said.

On the one hand, public and pri­vate con­sump­tion gained pace: after im­ple­men­ta­tion of the 7th cen­tral pay com­mis­sion rec­om­men­da­tions; and due to the re­vival in ru­ral de­mand after nor­mal mon­soon and agri­cul­tural im­pe­tus. On the other hand, over­all de­mand slowed as public in­vest­ments started to wane.

Ac­cord­ing to the bank, GST is ex­pected to dis­rupt eco­nomic ac­tiv­ity in early 2018, but the mo­men­tum may pick up. Ev­i­dence sug­gests that post-GST, man­u­fac­tur­ing and ser­vices con­tracted sharply, it said.

The growth ac­tiv­ity is ex­pected to sta­bilise within a quar­ter – main­tain­ing the an­nual GDP growth at 7 per cent in 2018. Growth is pro­jected to in­crease grad­u­ally to 7.4 per cent by 2020, 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 Bankruptcy Code, and mea­sures to at­tract the FDI), the bank re­port said.

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, along with the risk of an im­mi­nent in­crease in US in­ter­est rates, it said.

“If the in­ter­nal bot­tle­necks are not al­le­vi­ated, sub­dued pri­vate in­vest­ment would put down­side pres­sures on In­dia’s po­ten­tial growth,” the re­port said.

Down­side risks to the global econ­omy – and ac­cord­ingly to ex­port growth and cap­i­tal flows – are also sub­stan­tial given the pos­si­bil­ity of mone­tary pol­icy nor­mal­i­sa­tion in the US and risks of pro­tec­tion­ism, it added.

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