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‘GST, demonetisation may have heightened risks for poorest’: World Bank cuts growth projection to 6%

While India has been relatively hit hard by the recent global slowdown, World Bank's Chief Economist for South Asia Hans Timmer told PTI that it's still a "fast-growing economy."

By: Express Web Desk | New Delhi | Updated: October 13, 2019 10:46:48 am
World Bank, India's Growth Rate Projection, World Bank On India's Growth Rate, India's growth rate, Indian economy, India GDP, economic slowdown In 2018-19, it stood at 6.8 per cent, down from 7.2 per cent in the 2017-18 financial year.

The World Bank on Sunday said, India’s growth rate is projected to fall to 6 per cent for the 2019-20 financial year, news agency PTI reported. In its latest edition of the South Asia Economic Focus, the bank said, the country was expected to gradually recover to 6.9 per cent in 2021 and 7.2 per cent in 2022 as it assumed that the monetary stance would remain accommodative, given benign price dynamics.

The report, which has been released ahead of the annual meeting of the World Bank with the International Monetary Fund, noted India’s economic growth decelerated for the second consecutive year. In 2018-19, the growth rate of the country stood at 6.9 per cent.

The report also added that disruptions brought about by the introduction of the GST and demonetisation, combined with the stress in the rural economy and a high youth unemployment rate in urban areas may have heightened the risks for the poorest households.

While India has been relatively hit hard by the recent global slowdown, World Bank’s Chief Economist for South Asia Hans Timmer told PTI that it’s still a “fast-growing economy.” “So even with the recent slowdown, it has growth numbers that are higher than in most countries of the world. It’s still a fast-growing economy with a lot of potential,” he said.

The World Bank’s projections come at a time when India’s GDP growth rate slipped to a six-year low of 5% in the April-June quarter. This was the fourth straight quarter of slowdown.

In the first quarter of 2019-20, the economy experienced a significant and broad-based growth deceleration with a sharp decline in private consumption on the demand side and the weakening of growth in both industry and services on the supply side, the report said.

Reflecting on the below-trend economic momentum and persistently low food prices, the headline inflation averaged 3.4 per cent in 2018-19 and remained well below the RBI’s mid-range target of 4 per cent in the first half of 2019-2020. This allowed the RBI to ease monetary policy via a cumulative 135 basis point cut in the repo rate since January 2019 and shift the policy stance from “neutral” to “accommodative”, it said.

The World Bank report also noted that the current account deficit had widened to 2.1 per cent of the GDP in 2018-19 from 1.8 per cent a year before, mostly reflecting a deteriorating trade balance.

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According to the World Bank, poverty has continued to decline, albeit possibly at a slower pace than earlier. Between 2011-12 and 2015-16, the poverty rate declined from 21.6 to 13.4 per cent (USD 1.90 PPP/day).

The report said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from non-banking financial companies (NBFCs).

However, the investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but also will continue to reflect financial sector weaknesses, the report said.

“Growth is expected to gradually recover to 6.9 per cent in 2020-21 and 7.2 per cent in 2021-22 as the cycle bottoms-out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. However, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand,” the report said.

The main policy challenge for India is to address the sources of softening private consumption and the structural factors behind weak investment, the bank said.

“This will require restoring the health of the financial sector through reforms of public sector banks’ governance and a gradual strengthening of the regulatory framework for NBFCs, while ensuring that solvent NBFCs retain access to adequate liquidity.

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“It will also require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowd-out the private sector,” it said.

According to the bank, the main sources of risk included external shocks that result in tighter global financing conditions, and new NBFC defaults triggering a fresh round of financial sector stress.

To mitigate these risks, the authorities would need to ensure that there was adequate liquidity in the financial system while strengthening the regulatory framework for the NBFCs, the bank added.

(With inputs from PTI)

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