World Bank sees India’s economy growing at 7.5% in FY16

28 Apr 2015


The World Bank on Tuesday said the Indian economy has turned the corner and is expected to grow at 7.5 per cent in the current fiscal and that growth could accelerate as policy changes gain pace.

The World Bank in its latest India Development Update  said the turnaround has been aided by a supportive external environment, in particular the sharp decline in oil and commodity prices.

''Indian economy has taken strong strides towards higher growth and enhanced stability. Growth has accelerated, inflation has declined, the current account deficit has narrowed, and external reserves have increased'', the Bank said.

According to the Update, a twice yearly report on the Indian economy and its prospects, India's economic growth is expected to rise to 7.5 per cent in 2015-2016, followed by further acceleration to 7.9 per cent in 2016-2017 and 8.0 per cent in 2017-2018. However, acceleration in growth is conditional on the growth rate of investment picking up to 11 per cent during FY16-FY18, it adds.  

''While data constraints make it difficult to estimate potential gross domestic product with precision, we estimate potential growth to nearly converge to 8 per cent by 2017-18 from around 7 per cent in 2013-14, assuming both a meaningful and sustainable pick up in investment, as well as a pick-up in productivity growth,'' the World Bank said in a report.

For this, the report calls for fiscal reforms that protect public capital spending, financial sector reforms and reforms in the business environment - all of which can help unlock private investments.

Specifically the report calls for the timely implementation of the goods and services tax (GST), rationalising current expenditures, especially on subsidies, delivering on divestment plans, ensuring greater tax buoyancy, encouraging PPP projects and addressing balance sheet issues of public sector banks.

''The government has made progress in several policy areas and long-term prospects for growth remain bright for India,'' said Onno Ruhl, World Bank country director in India. ''The current situation offers an opportunity to further strengthen the business environment and enhance the quality of public spending. Continuous strong momentum in these reforms will further unleash the productivity that Indian firms need in order to create jobs and become globally competitive.''

In February, the government projected the economy would grow 7.4 per cent in the fiscal year ended 31 March, against the 5.5 per cent growth that most policy makers had been expecting.

The revision was due to updates in the base year and incorporation of new data. The sharply higher forecast raised doubts about the reliability of the new data as they presented a much more rosy picture of the economy than several other indicators, such as industrial production and exports, seemed to suggest.

The current update also specifically analyses the performance of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and draws on lessons from Bihar and other states to suggest a way forward.

Highlighting the findings, the update says while the scheme has the potential to drastically cut poverty, analysis of household survey data from Bihar shows the programme's actual impact on rural poverty in Bihar is only about 1 percentage point against its potential of reducing poverty by at least 14 percentage points.

The study highlights a number of reasons why the potential impact of MGNREGS may not be realised in practice: the supply side is too slow to respond to the demand for work on the scheme; workers are not paid the full scheme wage; delays in wage payment; and awareness of how to demand work is limited.

Paradoxically, the scheme has worked less well in poorer states, where it is needed the most. For example, in Bihar, more than two-thirds - about 10 percentage points - of the gap between the potential and actual impact of the scheme is due to unmet demand.  Whereas in Andhra Pradesh the scheme is shown to have delivered significant positive impacts on a range of outcomes - from consumption and nutrition, to quality assets and productivity improvements, particularly for the poorest.

The study shows that asset creation is key to the effectiveness of MGNREGS. The MGNREGS has an in-built self-targeting mechanism and most studies show that despite substantial unmet demand, participation in the scheme favors people from poorer families. However, unless assets created under MGNREGS are of sufficient value to the poor, it is unlikely to be cost-effective relative to an income transfer scheme, even with better targeting, the study says.

''With over 50 million beneficiary households at its peak, and expenditures between 0.5 and 1 percent of GDP, the MGNREGS is amongst the largest anti-poverty programs in the world. While the scheme has the potential to drastically reduce poverty, its performance in practice has been mixed,'' said Ruhl. ''To tilt the balance in favor of workfare, assets created need to be of sufficient value to the poor which can in turn serve as a vital ingredient for inclusive and expanded growth.''

Discrepancies in the stipulated wage rates and actual wages received by workers is contributing to the gap between potential and realized impacts. In Bihar, on an average, wages received on the scheme were about 10 per cent lower than the stipulated wage rate. More recently, payment delays have emerged as a major bottleneck and are a strong disincentive to participating in the program.

''If MGNREGS were to be implemented effectively, its design would ensure that there is no unmet demand for work. On-going efforts at convergence of the scheme with other programs will ensure that the assets created are productive and of lasting value,'' said Rinku Murgai, Lead Economist and one of the authors of the MGNREGS study. 

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