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World Bank keeps India's GDP growth projection at 7.5% in FY16

30 October 2015

The World Bank expects India's economy to grow at 7.5 per cent in 2015-2016 and further by 7.8 per cent in 2016-2017 and 7.9 per cent in 2017-2018. However, acceleration in growth is conditional on the growth rate of investment picking up to 8.8 per cent during FY2016-FY2018, it adds.

While growth will very likely remain above 7 per cent in the next fiscal year, the acceleration year-on-year will be gradual, says the latest India Development Update of the World Bank. 

The Update, a twice yearly report on the Indian economy and its prospects, says in the near term India is relatively well-positioned to weather the global volatility. Its low trade exposure to China and considerable foreign exchange reserves provide ample buffer.

However, in the medium term, the Indian economy is not immune to a slowdown in global demand and heightened volatility and that uncertainty about its momentum is high and downside risks ample.

India has gained from the sharp decline in global oil and commodity prices, which helped the country to eliminate petrol and diesel subsidies and increase excise taxes. Resources from lower subsidies and higher taxes have been well utilised in lowering deficits and increasing capital expenditure.

Current account deficit narrowed 3.4 percentage points between financial year 12-13 and 14-15 while capital expenditure increased by one third in the first six months of calendar 2015 compared to the previous year. During the same period the construction sector expanded by 4 per cent.

The update noted that while public investments have helped kick-start the investment cycle, increased participation of the private sector will be required going forward. 

However, the World Bank notes that India requires some measure of foreign capital inflows to finance both fiscal and current account deficits and ultimately the investments to spur growth.

Although India may be able to achieve fast GDP growth without export growth for a short period, sustaining high rates of GDP growth over a longer period will require a recovery of export growth, the update says.

The World Bank also called for three crucial reforms in the economy to boost growth - improving the asset quality of banks; rolling out the goods and services tax (GST); and improving service delivery by States and local bodies.

''While progress is visible in several areas, including improvements in the ease of doing business, some key reforms, most notably the implementation of GST can be a potential game changer for India,'' said Onno Ruhl, World Bank Country Director in India.

Though India is well positioned to weather the global volatility in the short term, the country will not remain immune to a slowdown in global demand and heightened volatility in the medium term, it noted.

The report said the government's efforts to lower the fiscal deficit next year onwards beyond the targeted 3.9 per cent of GDP this fiscal may have limited impact.

Global crude oil prices are unlikely to fall further, mounting payments from contingent liabilities from the infrastructure sector, and implementations of the Seventh Pay Commission report would further pressure its finances.

The World Bank's projection is, however, more optimistic than by other agencies such as the International Monetary Fund, which has pegged India's GDP (gross domestic product) growth at 7.3 per cent this fiscal.

Meanwhile, Japanese financial services major Nomura has projected India's GDP to clock a growth rate of 7.6 per cent this fiscal year, despite slowing external demand as the domestic growth cycle is improving.

The forecast is based on a jump in India's industrial output growth to a nearly three-year high of 6.4 per cent in August and retail inflation rising at 4.41 per cent in September.

These data ''reinforce our view that India is in a goldilocks period of low and stable inflation juxtaposed with a gradual growth recovery,'' Nomura said in a research note.

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