After falling below 7% in 2017-18, India’s economic growth may rise to 7.3% in 2018-19, with services continuing to remain the main driver. The manufacturing sector is also expected to accelerate following implementation of the goods and services tax (GST), according to a World Bank report. India’s gross domestic product (GDP) growth rate saw a temporary dip in the last two quarters of 2016-17 and the first quarter of 2017-18 due to demonetisation and disruptions surrounding the initial implementation of the GST. “Durable revival in private investments and exports would be crucial for India achieving a sustained high growth of 8% and above,” said Poonam Gupta, lead economist and the main author of the India Development Update, released on Wednesday. India’s GDP growth is projected to reach 6.7% in 2017-18, 7.3% in 2018-19 and 7.5% in 2019-20, according to the report. The latest data from the Central Statistics Office (CSO) showed that the economy grew at a better-than-expected pace of 7.2% in the third quarter of this fiscal due to strong showing by the manufacturing, agriculture and construction sectors. Services that largely held ground also boosted growth. The CSO also revised upwards its advance estimate of the rate of GDP expansion for 2017-18 to 6.6% from 6.5% seen earlier. The GDP grew by 7.1% in 2016-17.
Despite the recent momentum, attaining a growth rate of 8% and higher on a sustained basis will require addressing several structural challenges. “India needs to durably recover its two lagging engines of growth – private investments and exports – while maintaining its hard-won macroeconomic stability. Crucial steps in this process include cleaning up banks’ balance sheets, realising the expected growth and fiscal dividend from the GST, and continuing the integration into the global economy,” the report said.
Noting that reviving bank credit to support growth is important, the report said implementation of the new Insolvency and Bankruptcy Code is an important step towards improving the credit behaviour; and the recent efforts towards recapitalisation have potential to ease stress on the banking sector and reinvigorate bank credit. However, they need to be followed by wider reforms such as consolidation of public-sector banks. On the external front, while oil prices pose less of a risk for the Indian economy, the expected normalisation of the monetary policy by the US and other advanced economies are likely to tighten financing conditions for Indian firms, it added. Separately, the World Bank said it plans to raise lending to India by about $1 billion every year for the next five years from $3-$3.5 billion at present.