Pick-up in investments crucial to sustain economic growth, says World Bank

Onno Ruhl  

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.

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 RBI to cut interest rates.