World Bank pins hopes on monsoon for 7.6% growth

The World Bank has forecast India's economic growth at 7.6 per cent rate in the current financial year, the same as was registered in 2015-16. To grow at even this rate, the economy would have to activate its stalled engines - agricultural growth and rural demand, trade and private investment - and sustain demand from urban households and public investments, The World Bank said. Growth would gradually recover to 7.7 per cent next year and 7.8 per cent in 2018-19, it said in its latest India Development Update, released on Monday.

The report is titled Financing Double-Digit Growth and it prescribed the government carry out reforms, particularly in the financial sector, to enable the economy touch 10 per cent growth or more. Amid allegations that economic growth is not creating jobs, the World Bank report said manufacturing and services sectors, which expanded 7.4 per cent and 8.9 per cent respectively in FY16, also created urban jobs. It should be mentioned that the 7.6 per cent growth forecast the economy in the current financial year is 0.2 percentage points lower than predictions made in January.

 

Also, 7.7 per cent growth projection for 2017-18 is 0.2 percentage points less than the January prediction. However, even 7.6 per cent growth rate in 2016-17 would face headwinds from dissipation of the large boost from historically low oil prices in 2015-16, but the prospects of a normal monsoon would help, the update suggested. It is here that risks to even this truncated growth projection would arise. First, rains may not take place at the right places and times for optimal production.

Second, even under a favourable monsoon, the consumption impulse in the rural economy could be dampened by rural household indebtedness following two years of hardships, the World Bank said. Besides, given the waning oil dividend and high target for asset sales, the government might find it challenging to achieve fiscal consolidation while avoiding a negative impact of higher taxes or lower capital expenditure on growth. Also, the export demand may continue to deteriorate given elevated uncertainties about the global economy. Earlier, the World Bank had cut global economic growth projections by 0.5 percentage points to 2.4 per cent for 2016.

The latest report by the World Bank also said that adequate levels of reserves and a favourable current account position mitigate external risks, but domestic financial risks may rise as banks move to classify non-performing assets based on stricter criteria. In this scenario, the report also talked about India's ambitions to accelerate GDP growth to double digits. For this reforms are needed to unleash productivity growth through the proposed goods and services tax and easing business environment, accelerating private investment growth, besides enabling more women to join the labour force. The prescriptions came on a day the government announced changes in its foreign direct investment (FDI) policy.

World Bank country director for India, Onno Ruhl, said it was very important for the government to continue opening up sectors for investors. "The global economy is not going great, but India's economy is a bright spot. So, it is important for India to open up the economy for investors," he said.

The key issue here is whether India's financial sector would be able to support double-digit growth.