Nations like India should pad up for trade, manufacturing turbulence: WB

The World Bank on Wednesday said the Indian economy would grow at 7.3 per cent in 2018-19 (FY19), slightly higher than the official Advance Estimates (AE) of 7.2 per cent. However, it warned developing countries to be ready to cope with turbulence in international trade and manufacturing.

In its latest Global Economic Prospects report, the bank also maintained growth projections for India at 7.5 per cent for 2019-20. The multilateral agency, on the other hand, cut the global forecasts by 0.1 percentage points for both 2018 and 2019. (See chart). 

That is still a robust growth performance, the bank said. “But what we see happening are troubling signs in terms of international trade and manufacturing activities,” Kristalina Georgieva, chief executive officer, World Bank, said.

In this more challenging environment, there is urgency for emerging markets and developing economies to get ready to cope with possible turbulence and to build fiscal and monetary space, to build policy buffers, she said in a conference call with journalists.

Urging countries to accelerate reforms, Georgieva said from the bank’s perspective, this was critical for investing in human capital, lowering barriers to higher investments, and boosting positivity to make sure that they are integrated in the world economy in a way that helps them to expand and grow.

“They are softening and, on that background, we face two risks that are likely to persist throughout the year. One, trade tensions and two, financial strength in large emerging markets and developing economies,” she said.

Georgieva will serve as the interim president of the World Bank after Jim Yong Kim departs on February 1.

India would continue to remain the fastest-growing large economy in the world as the immediate competitor China was projected to grow 6.5 per cent in 2018 and 6.2 per cent in 2019.  

In India, growth has accelerated, driven by an upswing in consumption, and investment growth has firmed as the effects of temporary factors wane. However, rising interest rates and currency volatility are weighing on activity, the bank warned. 

It said the growth rates  mainly reflects strengthening domestic demand in India, as the benefits of structural reforms such as GST harmonization and bank recapitalization take effect.

“While investment continued to strengthen amid the GST (goods and services tax) harmonisation and a rebound of credit growth, consumption remained the major contributor to growth,” it said. 

It also said poverty rates remained the highest among low-income countries, but the majority of extreme poor currently reside in large lower-middle-income countries, including India and Nigeria.

Current growth projections suggest that the number of extreme poor should continue to fall rapidly in India, but remain broadly unchanged in some other countries, including Nigeria. 

While extreme poverty has declined notably, progress in alleviating poverty at higher income levels has been slower, with nearly a quarter of the world’s population still living with less than $3.20 per day, the bank said. 

The bank also said the government deficit was higher than planned, reflecting lower-than-expected revenues from telecom spectrum auctions and low dividends from public sector enterprises. 

Showing concerns over non-performing assets (NPAs), the bank said bad debts in South Asia were still high despite recent measures taken to improve the recognition of these assets.

“Especially, public sector banks in India, which represent roughly 70 per cent of the banking sector assets, still report low profitability and high NPAs,” it said.

Credit expansion could be limited in some major South Asia economies unless further steps are taken to deal with financial and corporate balance sheets. 

It also said there are some signs of rising inflation pressure across the region, and both India and Pakistan raised rates in 2018 to counter the effects of currency depreciation, rising energy prices, and domestic capacity constraints.

“Inflation is projected to rise somewhat above the midpoint of the Reserve Bank of India’s target range of 2 to 6 per cent, mainly owing to energy and food prices,” the bank said. 

The bank’s warning comes even as the retail price inflation fell to 17-month low of 2.33 per cent in November. 

The report said India had the least informality of the economy in the South Asia. 

For instance, Sri Lanka had the highest degree of informality (output in the informal sector is about 40 per cent of total output) in 2016 and India had the lowest share (below 20 per cent). However, this ranking was reversed using labour market indicators of informality. 

Sri Lanka had the lowest share of self-employment (42 per cent) and India the highest (76 per cent) as of 2016. These differences were reflected in lower labour productivity in the informal sector (relative to the formal sector) in India than in Sri Lanka.