World Bank’s latest India Development Report, a biannual report, expects India’s economic growth to be robust, however the associated year on year acceleration is characterized by uncertainty and downside risks. According to the update, in the near term India is relatively well positioned to maintain a 7 percent above growth rate and weather off any global volatility given its low trade exposure to China and sufficient foreign exchange reserves. The report acknowledges that the drastic decline in crude oil prices has helped India improve its growth performance. In terms of the domestic drivers, private consumption and public investment have been the front runners of growth. However, the overall performance of high-frequency macro indicators is mixed with agricultural growth, exports and credit growth displaying varying degrees of weakness. More importantly, in the medium turn, the continued momentum of growth will crucially depend on the recovery of export growth. The momentum will also depend on the implementation of key fiscal reforms, particularly the long pending Good and Service Tax (GST) and greater devolution of power from the center to states will enable better public service delivery mechanisms at the ‘local’ level.
The short term outlook: More green shoots with some black spots
The update retains the growth forecast for the world fastest growing economy at 7.5 percent in FY 15-16, followed by further acceleration to 7.8 percent in FY 16-17 and to 7.9 percent in FY 17-18. Lifted by a range of external events including the steep decline in international oil prices, current fiscal and monetary policy mechanisms and prospects of strict, effective and early implementation of crucial reforms, India is well positioned to maintain above 7 percent growth rate in the near term.
In FY14-15, India’s economy expanded by 7.3 percent and by 7.0 percent in Q1 FY 15-16. The expansion was driven by strong private consumption growth (private consumption expenditure expanded by 7.4 percent in Q1 FY 15-16 as compared to 6.3 percent in the same reference period last year) and government driven investment growth (central government capital expenditure excluding loans increased by 20 percent during the first five months of FY 15-FY 16) among other institutional factors and market forces. The high frequency macro-economic indicators including the Index of Industrial Production (IIP), Purchasing Managers’ Indices (PMI) has also shown modest expansion during the period. In terms of sectoral insights, service sector continued to be the primary driver of economic growth accelerating to 10.2 percent in FY 14-15.
Quite naturally, however, not all the economic drivers are in the desirable state. The growth in agricultural production has slowed down to 0.2 percent from 3.7 percent in the previous year due to this year’s sub normal monsoons. Another important grey area is the weak export demand of good and services which contracted by 0.8 percent in FY 14-15. The glooming asset quality scenario of the Public Sector Banks (PSBs) is another key challenge which may substantially impact the future credit growth outlook. This undesirable potential outcome is supported by the fact that as of March 2015, stressed assets of PSBs are at 13.5 percent of total loans while Non Performing Assets (NPAs) are about 6.0 percent of total loans.
The Outlook beyond: What Really matters?
To really walk the path of sustained economic growth is what India is looking forward to. Given the uncertain nature of global economic events, India’s progressive growth depends crucially on the speedy policy decision making and ground implementation of the key domestic reforms. India also requires a regular channels of foreign capital inflows which will not only help it maintain a future favourable balance of trade but also provide an extra impetus in form of investments to spur growth.
In addition, the report outlines three distinct and important intervention areas. Firstly, bringing back the banking sector, particularly the PSBs in the performance radar through sustainable solutions like providing resources for bank recapitalization and effective strategies for bringing down their exposure to long standing NPAs. Secondly, implementing crucial structural reforms, including the important Good and Service Tax (GST) displacing the current multi-layered system, holds high significance for creating one single market in India. Apart from this, policy reforms contributing to the ease of doing business in India and specific strategies to collect more direct taxes will also hold the key. Thirdly, acknowledging the growing shift of spending power from centre to the state and local governments, enhancing their capacity and governance mechanisms is key for better public service delivery.