India’s Gross Domestic Product (GDP) is likely to recover from the impact of demonetisation and the Goods and Services Tax (GST) to grow at 7.3 per cent in 2018-19, the World Bank said in its flagship India Development Update released on Wednesday.
Discounting oil prices as a major risk for India’s economic growth, the report said that achieving growth rates over 8 per cent will require durable revival in private investment, continued reforms and resolving of issues related to credit and investment and enhancing the competitiveness of the country’s exports.
The Economic Survey for 2017-18, authored by government’s Chief Economic Adviser (CEA) Arvind Subramanian, had pegged the growth for next financial year at 7-7.5 per cent. The World Bank in its report expects growth to accelerate to 7.5 per cent for India for 2019-20 from 6.7 per cent in the current fiscal ending March 31.
The ‘India Development Update’ was presented to the government for discussion last week, World Bank officials said. “We presented the report to the CEA’s office a week ago and we talked about it in great detail,” Poonam Gupta, Lead Economist-India, World Bank said.
On the declining risk of oil prices, Gupta said the projection is that oil prices will come down from early $60s (a barrel) to late $50s and thus, won’t be a major risk for the Indian economy. “Projection is that oil prices will actually come down even from the early $60 a barrel to late $50s. And if you actually see this year, oil prices have either subsided or even declined a little bit. Oil prices are slated to rise $65 a barrel only by 2040. so this is a prognosis of oil prices remaining low and not increasing to a level that it becomes a major risk for the Indian economy. Things can change, projections are projections. But these projections are based on long-term factors such as demand and supply and other factors,” she said.
The report, however, flagged the continuing low rate of private investment, saying it has been “enigmatically subdued”. “The investment rate has declined and remains low despite the fact that macroeconomic ability is much higher, public investment has picked up and its quality has improved; the business environment has improved; global liquidity has continued to remain benign; the Indian markets have done well, offering good valuations to the companies looking to raise money; and as per some indicators economic uncertainty has not worsened. All these factors should have helped spur private investment, yet private investment has been enigmatically subdued,” the report said.
The report also stressed upon the need to revive bank credit to support growth. “Besides recapitalisation, consolidation of public sector banks, revising their incentive structure to align it more closely with their commercial performance, ensuring a level playing field for private banks and opening the space for greater competition would all be important measures to durably enhance the stability and efficiency of the sector,” it said.
Gupta said the broad discussion for banking sector needs to move beyond a particular scam or default and ensure efficient channelising of savings into productive investment. “Talking about a particular scam or a default is perhaps not interesting or meaningful in that narrative. The narrative is whether the financial system is efficient enough to channelise savings into productive investment and whether its allocative efficiency across sectors and across regions is what is needed for an economy of India’s size and aspiration to move forward. That’s a very big discussion to have,” she said.
On exports, the World Bank said that the export growth rate remains well below the levels registered during the boom years of 2004-2008 and India’s export growth has lagged global growth in recent years. Among the many preconditions for India to reverse this pattern are an infrastructural boost to bring it on par with the world’s current manufacturing hubs, it said. In addition, reforms to land, labor and financial markets would be needed to assure the continued competitive supply and use of key production inputs, it said.
The report also said that a definite and durable solution to the banking sector issues, realisation of expected growth and fiscal dividend from the GST and regaining the momentum on an unfinished structural reform agenda would be key components to maintain the hard won macroeconomic stability.