India will likely grow 7.5% in the current fiscal, pipping China as the world’s fastest-growing large economy a year earlier than assumed previously, thanks to recent policy reforms, a consequent pickup in investment and lower oil prices, the International Monetary Fund (IMF) said in a report on Tuesday.
Although the multilateral agency capped its global growth projection for 2015 at 3.5%, the same level as was forecast in January, it trimmed the US expansion forecast by 0.5 percentage point and 0.2 percentage point for 2015 and 2016, respectively, from earlier projection levels, to 3.1% for both years. The multi-lateral body also raised the growth forecasts for the EU by 0.3 percentage point and 0.2 percentage point, respectively, from its earlier projection of 1.2% for 2015 and 1.4% for the year after that.
India’s GDP is now projected to grow 7.5% in both 2015-16 and the fiscal after that (based on market prices), while China, having experienced its worst economic slowdown in 24 years last year, could witness its growth sliding further to 6.8% in 2015 and 6.3% in 2016. While the IMF’s growth projections for China have been retained at the January level, those for India have been revised up by from 6.3% for 2015-16 and 6.4% for 2016-17.
India recently changed the way it computed its national income as well as the base year, leading to a sharply upward revision in growth, especially from 2013-14 onwards, which may have also prompted the IMF to bolster its projections substantially about the country.
For India to sustain high growth rates for a longer period, the multilateral body has advocated the removal of infrastructure bottlenecks in the power sector and implementing reforms in education, labour and product markets to raise competitiveness and productivity. “In India, the post-election recovery of confidence and lower oil prices offer an opportunity to pursue such structural reforms,” it said.
Although the IMF trimmed its growth forecasts for the US, it said markedly lower energy prices, tamed inflation, reduced fiscal drag, strengthened balance sheets, and an improving housing market are expected to sustain the growth momentum in the next two years through 2016. “However, the picture over a longer horizon is less upbeat, with potential growth estimated to be only about 2%, weighed down by an aging population and weaker total factor productivity growth,” it added.
While projecting higher growth rates for the EU, the agency said a decline in oil prices, lower interest rates and euro depreciation, as well as the shift to a broadly neutral fiscal stance, are projected to boost activity in 2015-16. However, crisis legacies and a slowdown in total factor productivity that predates the crisis have been blamed for the moderate growth and subdued inflation in the euro area, it said.
Growth in China is expected to slow down from last year, as previous excesses in real estate, credit, and investment continue to unwind. “The Chinese authorities are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth, and hence the forecast assumes less of a policy response to the underlying moderation” it said.
India’s growth may touch 8% next fiscal, says World Bank
India could achieve a growth rate of 8% by 2016-17, up from 7.5% in the current fiscal, on the back of a spike in investment. As India seeks a shift from consumption to investment-led growth — when China is undergoing the opposite transition—the country is expected to witness investment growth of 12% in the two years through FY18. The report said India has taken some steps to decouple international oil prices from fiscal deficits and to introduce carbon taxation to address the negative externalities from the use of fossil fuels. The challenge will be to stay the course in the event of oil price hikes, something that may well happen, it added. According to the Central Statistics Organisation, the country’s gross fixed capital formation is expected to have grown 4.1% in 2014-15, up from 3% a year before.