India's economy to grow 7.5% in FY'16 and 8% by FY'18: World Bank

New Delhi: The World Bank said on Tuesday that India’s economy seemed to have turned the corner, with outlook improving significantly. It, however, projected the economy to expand by 7.5 per cent during the current financial year, much lower than the Budget assumption of 8.5 per cent.

In its ‘India Development Update’, the World Bank pegged India’s economic growth rate at 7.9 per cent for the next financial year (FY17) and eight per cent for FY18, which are not up to the expectations of the government, but higher than the International Monetary Fund’s (IMF) projections. While the IMF projected India’s economic growth to be 7.8 per cent even in 2020-21, according to the World Bank, there will be much faster growth.

The Bank warned against domestic risks — weak banking sector due to bad debts and a slowdown in credit growth, stuck-up projects, over-leveraged corporate sector, etc. Besides, there are external challenges which might come in the form of reversal of declining oil prices, normalisation of monetary policy in the US and weak global trade growth.

With India’s economy mostly domestic-driven, internal risks far outweighed external risks, the Bank said.

The Bank assessed that India’s economy grew 7.2 per cent for FY15, lower than the official advance estimate of 7.4 per cent.

The World Bank’s projections for India’s growth for FY16 was not only quite lower than the Budget assumption, but also the Reserve Bank of India (RBI)’s expectation of 7.8 per cent.

“Going forward, acceleration in real GDP growth would be driven largely by higher gross fixed capital formation, which is expected to grow at an average 11 per cent annually during FY16-FY18,” the report said.

While Finance Minister Arun Jaitley said the new normal for economic growth should be 9-10 per cent for the government to set its eyes on, according to National Institution for Transforming India Aayog Vice-Chairman Arvind Panagariya, India’s economy might grow 8-10 per cent in the next 15 years.

Giving the details of the report, Poonam Gupta, senior economist with the World Bank, said the economic growth spurts were comparable with what was seen in the mid-1990s and mid-2000s. Talking of domestic risks, the Bank highlighted the importance of persistent reforms. It said if implemented fully, reforms might improve the business environment and alleviate constraints to firm growth.

To a query on the assessment of the Narendra Modi government’s efforts to improve business climate, World Bank country director for India, Onno Ruhl, said: “I would describe the government’s work on ease of doing business as very strong.”

He said the current situation offered an opportunity to further strengthen the business environment and enhance the quality of public spending. India stood 142 among 189 countries in the World Bank’s ranking in terms of ease of doing business. The Modi government aims to improve India’s position to 50 in two years.

Gupta said India should explore alternative channels for long-term investment, while reviving the public-private-partnership model of financing to meet India’s yawning gap.

“Simultaneous efforts to increase the tax-to-GDP ratios, through the timely implementation of GST (goods and services tax) as well as complementary measures to improve tax administration and compliance can generate additional fiscal space in the years ahead,” she said. Gupta added although the government and RBI had signed inflation targeting framework, the monetary transmission mechanism remained weak.

Cautioning against external risks, the World Bank said that even though the Federal Reserve board had continued to maintain its stance on monetary policy, the expectations were that it would start the tightening phase sometime soon.

“India being one of the larger financial markets and a large recipient of capital flows, could be adversely affected by a re-balancing triggered by the tightening of the Fed’s monetary policy,” it said. While Gupta said she did not expect the Fed to raise rates at its meeting that would conclude on Wednesday, several countries and regions with strong trade, diaspora and investment links with India continue to face a soft growth patch, dampening the external outlook.

Countries that figure most prominently among large destinations for Indian exports as well as its diaspora, such as the United Arab Emirates, Saudi Arabia, China and Europe, among others, face subdued growth prospects.

“These could translate into some slowdown in remittances, and possibly in FDI (foreign direct investment) flows into India, while undermining the prospects for resurgence in exports growth,” the Bank said.

Warning further, the report said the current economic narrative described in the Economic Survey as India being in a “sweet spot”, characterised by decline in inflation, current account deficit, and fiscal restraint derives partly from the recent sharp decline in the international prices of oil, metals and food.

“This narrative could alter if prices fail to stay low, reinforcing the imperative for the government to insulate the economy even more determinedly from the global price of oil,” it said.

The Bank said this could be done by weaning the fiscal outcomes fully from oil prices by reducing the intensity of use of imported oil, while encouraging alternative sources of energy; by mulling the possibility of creating additional fiscal buffers by using petroleum taxation more actively; and by appropriating the current sweet spot moment to further rationalise the still high levels of subsidies on food and fertiliser.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.