The World Bank has cut its growth forecast for India for the current fiscal year ending March 2014 to 4.7 per cent from a previous estimate of 6.1 per cent but said that the recent global market turmoil is unlikely to have major adverse effect and instead provides an opportunity to regain growth momentum through further reforms.
In its latest India Development Update the World Bank said global investors have focused more intensely on large emerging economies with greater current account and fiscal deficits as they withdrew funds from emerging markets in anticipation of an early end to the US Federal Reserve’s quantitative easing program. In this risk-averse environment, India’s large twin deficits and slowing growth momentum added to investors’ fears.
“Recovering the higher rates of growth in India is critical to achieving the global goal of ending extreme poverty by 2030,” said Martin Rama, chief economist for the South Asia Region at the World Bank. “While the reform momentum has accelerated in the last few months, the current situation offers an opportunity to further strengthen the business environment and enhance fiscal space.”
The report expects real GDP to expand by 4.7 per cent this fiscal year before accelerating to 6.2 per cent in FY15. Although output growth in the first quarter of the current fiscal year fell to 4.4 per cent, growth is expected to rebound strongly in the second half of FY14 with core inflation trending down, a bumper crop expected in agriculture (where a 5 per cent increase in area sown is expected to raise agricultural growth to 3.4 per cent from 1.9 per cent a year ago), and exports likely to benefit substantially from the rupee’s depreciation.
Growth is expected to improve further in the medium term as strengthening exports support a recovery in industrial activity and new investment projects come on stream, the report added.
The report’s projections assume an improvement in the global macroeconomic environment, with global growth accelerating to above 3 per cent in 2014 from around 2 per cent in calendar year 2013.
World Bank said the recent depreciation in the rupee positions India well to take advantage of the global recovery. Fully tapping these opportunities, however, will require policy efforts to narrow the infrastructure gap, buttress the financial sector via capitalisation and broader banking & financial sector reforms, ease the restrictive regulatory environment which creates strong incentives for Indian firms to remain small, and strengthen fiscal balances, it added.
“India’s growth potential remains high but its macroeconomic vulnerabilities–high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances from the depreciation of the rupee–could impact the speed of economic recovery,” said Denis Medvedev, senior country economist, World Bank, India.
“While market sentiment improved in the last few weeks, the underlying challenges remain, underscoring the importance of prudent macroeconomic policies and continued progress on reforms to set strong foundations for accelerated growth in the future,” he added.
The report also notes that while decline in poverty accelerated, vulnerability remains high. Between 2005 and 2012, India lifted 137 million people out of poverty and reduced the poverty rate to 22 per cent.
India has also improved its performance on shared prosperity, with consumption growth of the bottom 40 per cent accelerating significantly since 2005. At the same time, however, more than half of India’s population remains vulnerable–living between one and two poverty lines–and growth in the bottom 40 per cent continues to lag slightly behind average growth.
“The pace of poverty reduction in India has become faster over the years, growth has become more effective in reducing poverty, and a much larger fraction of the decline is taking place in low-income states,” according to Medvedev.
The International Monetary Fund (IMF) today lowered its projection of India’s growth rate to 3.75 per cent in 2013 from 5.7 per cent estimated earlier on account of poor demand and weak manufacturing and services sector performance.
Last week, in its World Economic Outlook report, the IMF had cut its growth forecast for India from 5.7 per cent to 3.75 per cent in the current year and from 6.2 per cent to 5 per cent for next year. It had said the growth in agriculture would be offset by lacklustre activity in manufacturing and services sector.