Prompted by the introduction of Goods and Services Tax (GST) and recapitalisation of banks following demonetisation, the Indian economy is growing at a firm rate and will see further acceleration, World Bank’s latest report on South Asia has revealed.
The report projects the growth to accelerate to 7.3 per cent in the 2018-19 fiscal year and 7.5 per cent in the next two years, with stronger private spending and export growth as the key drivers. It also said that the Indian economy appears to have recovered from the temporary disruptions caused by demonetisation and the introduction of the GST.
Growth reached 6.7 per cent in fiscal year 2017/18, with a significant acceleration in recent months, it said.
The report credited a robust growth in the second half for the turnaround, which was led by manufacturing sector (that grew at 8.8 per cent versus 2.7 per cent in the first half) and domestic consumption, which grew at 7 per cent. Agriculture growth also improved, and services growth held steady at 7.7 per cent, the report said.
On the demand side, the pick-up in growth was reflected in a sharp acceleration in gross fixed capital formation to 11.7 per cent in the second half, from 3.4 per cent in the first.
Observing that the external situation has become less favourable and the current account balance has deteriorated, the Bank said that a worsening trade deficit has led the current account deficit to widen — on the back of a strong import demand, higher oil prices and exchange rate depreciation — from a benign 0.7 per cent of the GDP in fiscal year 2016/17 to 1.9 per cent in fiscal year 2017/18.
External headwinds – monetary policy ‘normalisation’ in the US coupled with recent stress in some Emerging Market and Developing Economies – have triggered portfolio outflows from April 2018 onwards, the report said.
It said that as a result, the nominal exchange rate depreciated by about 12 per cent from January to September 2018, and foreign reserves declined by over 5 per cent since March, while remaining comfortable at about nine months of imports.
Of the view that India faces continued internal and external risks, the World Bank said that high oil prices and an uncertain global trade environment may pose challenges for the current account.
“A widening trade deficit is likely to lead to a current account deficit of around 2.6 per cent of the GDP in fiscal year 2018/19, and tighter global financing conditions will put added emphasis on India’s ability to attract Foreign Direct Investment (FDI),” it said.
Fiscal consolidation is expected to resume in fiscal year 2018/19, but slippages could happen on both the revenue side (as the GST is still stabilising) and the expenditure side (ahead of state and federal elections), it said.
“Elevated oil prices, a recent hike in agricultural support prices and further exchange rate depreciation could keep the inflation outlook challenging, possibly resulting in further monetary policy actions,” the report added.