World Bank pats India, pegs GDP growth at 7.5% in FY16

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April 28, 2015 10:39 PM

Finance Ministry expects GDP growth to be 8-8.5 per cent in 2015-16, and the Reserve Bank (RBI) has estimated it at 7.8 per cent.

Indian economyWorld Bank said the Indian economy has been on the upturn in the past three quarters — growth accelerated, inflation declined, the current account deficit narrowed and external buffers replenished. (Reuters)

Projecting a growth rate of 7.5 per cent for 2015-16, the World Bank today suggested that India should step up economic reforms and encourage domestic companies to become “globally competitive”.

“GDP growth (at market prices) is expected to accelerate to 7.5 per cent in 2015-16 reaching 8 per cent in 2017-18. Acceleration in growth is conditional on the rate of investment picking up to 11 per cent during FY16 to FY18…

“Low crude oil prices, improved production capacity and the adoption of the flexible inflation targeting framework, would likely keep inflationary pressures in check, inflationary expectations anchored and help prevent overheating in the medium-term,” read the India Development Update released here today.

Recognising the government’s efforts, the Update said it has embarked on an “energetic progress” in several policy areas and the pace of these efforts would need to be maintained or even stepped up to unleash the productivity and scale enhancement needed for the Indian firms to become “globally competitive”.

“The government has made progress in several policy areas, and long-term prospects for growth remain bright for India. The current situation offers an opportunity to further strengthen the business environment and enhance the quality of public spending.

“Continuous strong momentum in these reforms will further unleash the productivity that Indian firms need in order to create jobs and become globally competitive,” said Onno Ruhl, World Bank Country Director in India.

The World Bank said the Indian economy has been on the upturn in the past three quarters — growth accelerated, inflation declined, the current account deficit narrowed and external buffers replenished.

“…developing more policy space to the states may produce enclaves of competitiveness and help garner further support for wider reforms among the population and political classes across India.”

It said decline in inflation and fiscal restraint generated some room for monetary accommodation, making it possible for the RBI to lower the policy rates twice in the last quarter of 2014-15.

To achieve higher investment growth, the India Development Update has suggested fiscal reforms that protect public capital spending, financial sector reforms and reforms in business environment — all of which can help unlock private investments.

It drove home the need for a timely implementation of Goods and Services Tax (GST), rationalising current expenditures, especially on subsidies, delivering on disinvestment plans, ensuring greater tax buoyancy, encouraging public-private projects and addressing balance sheet issues of public sector banks.

The International Monetary Fund (IMF) has projected a growth rate of 7.5 per cent for the current fiscal while Asian Development Bank (ADB) puts it at 7.8 per cent for 2015-16 and 8.2 per cent for 2016-17.

However, the Finance Ministry expects GDP growth to be 8-8.5 per cent in 2015-16, and the Reserve Bank (RBI) has estimated it at 7.8 per cent.

Flagging off domestic and external risks, the World Bank said the recent economic turnaround and the outlook (of World Bank on Indian economy) also hinge crucially on oil and commodity prices staying low.

The Update suggested weaning the fiscal outcomes more fully away from oil prices by encouraging alternative sources of energy, creating additional fiscal buffers by using petroleum taxation more actively as well as rationalising subsidies.

World Bank Senior Economist Poonam Gupta, on her part, wants India to explore alternative channels for long-term investment and increase tax-to-GDP ratios.

She said an improved tax administration and compliance can generate additional fiscal space in years ahead.

Ruhl said unlocking investment and credit growth remain a challenge, and construction companies have been finding it hard to get the desired working capital.

The Update said Indian government has announced an ambitious development agenda supported by a three-pronged strategy of promoting fast and durable economic growth, a stable macroeconomic environment and improving the delivery of social benefits and extending social safety to the elderly and the underprivileged.

“…if this agenda is successfully implemented, it carries great promise of an acceleration in economic growth that is also inclusive and sustainable.”

Talking about the US monetary policy, the Update has struck a note of caution as the financial market is a major recipient of capital flows.

“While the Reserve Bank of India has taken preventive measures to reduce external vulnerability and has built international buffers as a first line of defence, the risk remains, warranting vigilance,” said Gupta.

On the performance of Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the World Bank takes into account the potential to drastically reduce poverty, but is doubtful that the potential impact of the programme may not be realised in practice.

“..survey data from Bihar show the programme’s actual impact on rural poverty in Bihar is only about 1 percentage point against its potential of reducing poverty by at least 14 percentage points,” it noted.

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