India has lost the place as the fastest growing economy in south Asia. International financial institutions like the World Bank, the IMF have attributed India’s economic slowdown, at least partly, to demonetisation and rolling out of the Goods and Services Tax (GST).
Here are the assessments of India’s economic slowdown by global financial institutions and the government’s stand on the matter.
International Monetary Fund
The International Monetary Fund cut down India’s growth projections for 2018-19. The IMF reduced India’s growth to 6.7 per cent. It also reduced the forecast for the next fiscal to 7.4 per cent.
“In India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the mid-year introduction of the countrywide Goods and Services Tax,” the report said.
The World Bank in its report South Asia Economic Focus Fall 2017 released on Monday said that the slowdown in South Asia was “driven by India”. The report said: “India grew by over nine per cent in the first quarter of last year, but since then its growth has experienced a stepwise deceleration. While it still grew above seven per cent during the rest of 2016, growth slowed to 6.1 per cent in the second.”
It said the top spot for fastest growing economy in South Asia and the fastest growing big economy has gone back from India to China, which grew at 6.9 per cent in the second quarter of this year.
“Disruptions from demonetisation and events surrounding the implementation of GST led to a setback in economic activity and a potentially larger negative effect on the poor and vulnerable. Looking ahead, return to business as usual and subsequent rebalancing of growth drivers towards investment could support acceleration of GDP growth to 7.4 per cent by FY2019,” the report said, adding that growth will be accompanied by heightened uncertainty due to “impact on informal economy”.
“GST is expected to disrupt economic activity in early FY2018, but momentum (is likely) to pick-up. Evidence suggests that post-GST manufacturing and services contracted sharply. However, activity is expected to stabilise within a quarter – maintaining the annual GDP growth at 7.0 per cent in FY2018. Growth is projected to increase gradually to 7.4 per cent by FY2020, underpinned by a recovery in private investments, which are expected to be crowded-in by the recent increase in public capex and an improvement in the investment climate (partly due to the passage of GST and Bankruptcy Code, and measures to attract FDI).
Pointing out challenges now faced by India, the World Bank said that “most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments,” adding, “If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India’s potential growth.”
Asian Development Bank
The Asian Development Bank also made a downward revision of India’s growth in its Asian Development Outlook 2017 released last month. ADB said in its report: “India’s GDP growth is downgraded to 7 per cent in financial year 2017-18, a 0.4 percentage point drop from the April forecast. In financial year 2018-19, the forecast is adjusted down to 7.4 per cent, from 7.6 per cent.”
Nevertheless, the report said that the newly implemented GST regime will prove beneficial in the long run and make India one of the most dynamic and competitive economies. “Growth will further pick up in 2018-19 as the new tax regime improves domestic competitiveness and government efforts to improve the health of the banking sector to aid private investment yield results,” the report added.
What the government says
Finance Minister Arun Jaitley is on a week long trip of the US to attend meetings of the World Bank and IMF. Addressing students at the Columbia University in New York, he said that the reforms undertaken by the Centre like GST were institutional and structural reforms will bear fruit in the long run.
“These are institutional reforms. These are structural changes. And these structural changes, I think have put the Indian economy on a far more sound track so that we can look forward for a much cleaner much bigger India economy in the days and years to come,” Jaitley said.
The finance minister laid emphasis on formalising the economy and taking steps against shadow economy. “Consistent steps have been taken to formalise and expand the more formal economy as far as India is concerned. And wanting to formalise that economy, one after the other steps are taken against shadow economy. Some of these steps, the demonetisation, the GST because the GST could lead to de-stocking of existing stocks can have for a quarter or so a transient impact on manufacturing. But in the long run, these are institutional reforms and structural changes,” he said.