Describing South Asia as a global growth hotspot, the World Bank has said India’s GDP growth will remain strong at 7.6% in 2016 and 7.7% in 2017.
“In India, GDP growth will remain strong at 7.6% in 2016 and 7.7% in 2017, supported by expectations of a rebound in agriculture, civil service pay reforms supporting consumption, increasingly positive contributions from exports and a recovery of private investment in the medium term,” the World Bank said in its latest report on South Asia Economic Focus released on October 3.
“However, India faces the challenge of further accelerating the responsiveness of poverty reduction to growth, promoting inclusion, and extending gains to a broader range of human development outcomes related to health, nutrition, education and gender,” said the biannual report.
According to the report, South Asia remains a global growth hotspot and has proven resilient to external headwinds such as China’s slowdown, uncertainty around stimulus policy in advanced economies, and slowing remittances.
The main challenges remain domestic, and include policy uncertainty as well as fiscal and financial vulnerabilities.
The report also listed out “significant downside” risks in the near term.
“First, continued uncertainties in the global environment, volatility in commodity prices, broader spillovers from Brexit on world trade, and a further slowdown of the Chinese economy, could further delay a recovery of external demand,” it cautioned.
Second, it said, the government has set ambitious targets for raising revenue from divestment and spectrum auctions. If these are not met, there is a risk that growth-enhancing capital and social spending may be cut to meet fiscal targets, or that fiscal targets may be missed, undermining the credibility of fiscal policy, it warned.
The expected boost to rural consumption from favorable monsoons could be dampened by deleveraging of debt incurred by farmers over the previous two drought years.
Private investment also faces several domestic impediments in the form of corporate debt overhang, stress in the financial sector, and regulatory and policy challenges.
“If these bottlenecks are not alleviated, subdued private investment would create downside pressures on India’s potential growth,” the report said.
The World Bank said economic growth remains robust. GDP growth accelerated to 7.5% year-on-year in the four quarters ending June 2016 from average of 6.5% in the previous twelve quarters, it said.
This acceleration has been led by urban consumption and public infrastructure investments, it said, adding that rural consumption has been constrained by two successive drought-years and subdued growth in rural wages.
Sustained growth in manufacturing and modern services, as well as growth in personal credit have underpinned urban consumption. Investment momentum remained subdued despite concerted growth in public spending, largely due to global excess capacity and deleveraging of corporate and bank balance-sheets, the report said.
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