World Bank cuts India growth projection to 6%; IMF to 6.1%

After a broad-based deceleration in the initial quarters of this fiscal year, India’s growth rate is projected to fall to 6 per cent, the World Bank said. Both IMF and Ind-Ra ratings have also reduced India’s projected growth rate for this fiscal tro 6.1 per cent.

In 2018-19, the growth rate of the country stood at 6.9 per cent.

However, the bank in its latest edition of the South Asia Economic Focus 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 noted India’s economic growth decelerated for the second consecutive year. In 2018-19, it stood at 6.8 per cent, down from 7.2 per cent in the 2017-18 financial year.

While industrial output growth increased to 6.9 per cent due to a pick-up in manufacturing and construction activities, the growth in agriculture and the services sector moderated to 2.9 and 7.5 per cent, respectively.

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.

On the financing side, significant capital outflows in the first half of the current year were followed by a sharp reversal from October 2018 onwards and a build-up of international reserves to $411.9 billion at the end of the fiscal year.

Likewise, while the rupee initially lost ground against the dollar (12.1 per cent depreciation between March and October 2018), it appreciated by about seven percent up to March 2019, the report said.

“The general government deficit is estimated to have widened by 0.2 per centage points to 5.9 per cent of the GDP in 2018-19. This is despite the central government improving its balance by 0.2 per centage points over the previous year. The general government debt remained stable and sustainable-being largely domestic and long term-at around 67 per cent of GDP,” the report said.

The report, however, said 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.

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.

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. “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.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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