The World Bank expects India’s economy to expand 7.6 per cent in 2016-2017, followed by a modest acceleration in the rate of growth to 7.7 per cent in 2017-2018 and 7.8 per cent in 2018-2019.
GDP accelerated to 7.6 per cent in 2015-16 from an average of 6.5 per cent during the three-year period 2012-13 — 2014-15, the World Bank’s India Development Update released on Monday said. India’s economy expanded at a faster pace even as several growth engines stalled. Agriculture faced a second consecutive year of drought, rural households were under stress, private investments remained flat and exports plummeted, the report said. Despite these drags, the working engines — demand from urban households and public investments — propelled the economy to a higher growth path.
To remain on this growth path and sustain the 7.6 per cent growth rate in 2016-17, India will need to re-start dormant growth drivers while ensuring that the working engines do not run out of fuel, according to the report. Prospects of a normal monsoon, which can reactivate agriculture and rural economy, may help.
“There are good reasons for confidence in India’s near-term prospects. However, a pickup in investments is crucial to sustain economic growth in the longer term,” World Bank Country Director in India, Onno Ruhl, cautioned, releasing the Update.
Challenges aplenty
The bi-annual report on the economy and its prospects said that India’s sources of growth had been few, with many segments of the economy facing challenges. External demand has been tepid and GDP growth has relied exclusively on domestic demand, which itself has been running on just a few engines. Private investment stagnated and likely contracted in the January-March quarter.
Private consumption, which accelerated to 7.4 per cent in 2015-16 from 6.2 per cent in 2014-15, is puzzling, given that over two-thirds of Indian households are in rural areas, which suffered a second year of sub-par monsoons in 2015-16, according to the report.
Growth in agriculture output remained muted at 1.2 per cent. Urban households appear to have been the main drivers of growth in 2015-2016. The manufacturing and services sectors, which expanded 7.4 and 8.9 per cent respectively, are likely to have created urban jobs. Inflation abated, primarily because of lower food prices.
Lower inflation raised real incomes, allowing the Reserve Bank of India to cut interest rates, which favoured the financially-connected urban households.
Contributing to uncertainty about underlying economic drivers, statistical discrepancies, as reported in the national accounts, explained an unusual share of growth in 2015-16, the report said.
Manufacturing output expanded faster than the overall economy for givenconsecutive quarters at an average of 8.8 per cent.
India’s ambitions to accelerate GDP growth to double-digits will require a strong financial sector to allocate savings towards the most productive investment opportunities.
The Update suggests two key reform fronts for the financial sector. First, accelerate the ongoing structural transformation of the sector towards one that is more market-oriented and competitive. For example, by providing a roadmap for relaxing government mandates on banks. Second, address the non performing assets(NPAs) challenge, both by its branches (through recapitalisation of public sector banks and providing tools for banks to manage stressed assets), and its roots (through stronger governance of both commercial banks as well as the corporate sectors that have generated the largest share of NPAs).
“India’s financial sector has performed well on many dimensions and can be a reliable pillar of future economic growth. However, accelerating structural reforms and addressing the NPA challenge remain urgent tasks,” said Frederico Gil Sander, Senior Country Economist and main author of the India Development Update.
