UN report projects India's FY17 GDP growth at 7.7%

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18 January 2017

Close on the heels of a cutting of India's projected GDP growth by both the World Bank and the International Monetary Fund, the United Nations has now projected a more favourable growth estimate of 7.7 per cent citing potential of the significant economic reforms carried out by the government.

India is projected to grow by 7.7 per cent in fiscal 2017, remaining the fastest growing large developing economy, as it benefits from strong private consumption and gradual introduction of significant domestic reforms, a United Nations report said.

The International Monetary Fund had cut India's growth rate for the current fiscal year to 6.6 per cent from its previous estimate of 7.6 per cent while the World Bank estimated India's GDP growth for 2016-17 fiscal to be around 7 per cent, down from its previous estimate of 7.6 per cent both citing the impact of demonetisation.

The United Nations World Economic Situation and Prospects (WESP) 2017 report released on Tuesday projects India's economy growing at 7.7 per cent in fiscal year 2017 and 7.6 per cent in 2018, benefiting from strong private consumption.

It, however, cautioned that low capacity utilisation and stressed balance sheets of banks and businesses will prevent a strong investment revival in the short term.

On the other hand, China's growth is projected to remain stable at 6.5 per cent for fiscal years 2017 and 2018, supported by favourable domestic demand and accommodative fiscal measures, including off-budget fiscal support through policy banks and public-private partnerships.

However the implications of China's ongoing economic re-balancing will inevitably be felt by the region in the medium and long-run through trade (including commodity prices) and financial channels, albeit to a varied extent across countries, the report added. 

The report, by the UN's flagship publication on expected growth trends projects a general slowing of growth in developing economies to lows around 3.6 per cent in 2016, the slowest pace of expansion since the global financial crisis.

The UN report fails to address the effects of how the withdrawal of the high-denomination Rs500 and Rs1,000 currency notes impact India's economic activity and GDP growth. It seems most of the assumptions were based on pre-demonetisation economic situation.
 
Instead, the report bases its estimates on the dynamics of the India economy, which has positioned itself as the most dynamic emerging economy among the largest countries and is expected to remain the fastest growing on the back of robust private consumption and significant domestic reforms gradually being implemented by the government.

The UN report estimates that the Indian economy had grown by 7.6 per cent in the 2016 fiscal.

In India, "investment demand is expected to slightly pick up, helped by monetary easing, government efforts towards infrastructure investments and public-private partnerships, and the implementation of domestic reforms such as the introduction of the Goods and Services Tax (GST) Bill," the report said.

It added that the GST reform constitutes a "major change" by establishing a new uniform tax rate. The reform should promote investment in the medium term through lower transaction and logistic costs and efficiency gains. Its effective implementation requires adequate capacity building of the tax administration.

The report added that in India, in spite of a strong emphasis on rural areas and infrastructure investments on the expenditure side, fiscal policy has largely followed a cautious approach and the budget deficit is expected to further decline gradually. For 2016/17, the deficit is projected to reach 3.5 per cent of GDP and is on track to meet the medium-term target of 3.0 per cent of GDP.

On inflation, the report forecast consumer price inflation for India at 5.7 in 2017, declining slightly to 5.4 in 2018. The report said the world economy expanded by just 2.2 per cent in 2016, the slowest rate of growth since the Great Recession of 2009. World gross product is projected to grow by 2.7 per cent in 2017 and 2.9 per cent in 2018, a slight downward revision from the forecasts made last May.

Although a modest global recovery is projected for 2017-18, the world economy has not yet emerged from the period of slow growth, characterised by weak investment, dwindling trade and flagging productivity growth, the report added.

Launching the report here, Assistant Secretary-General for Economic Development, United Nations Department of Economic and Social Affairs, Lenni Montiel underscored the "need to redouble the efforts to bring the global economy back on a stronger and more inclusive growth path and create an international economic environment that is conducive to sustainable development".

It added that global oil demand continued to grow in 2016 but the pace of growth was slower than in 2015 as the positive boost from low oil prices to consumption growth waned

"Oil demand was driven mainly by robust consumption in the large emerging economies, particularly China and India," the report said adding oil demand is expected to continue strengthening in line with the projected improvement in global growth. Growth in oil demand will remain supported mainly by the United States and the large emerging economies, particularly China and India.

Growth in developing economies slowed to a meagre 3.6 per cent in 2016, the slowest pace of expansion since the global financial crisis, mainly due to lower commodity prices, weak global trade and persistent uncertainties in the world economy.

Going forward, average growth in developing economies is expected to pick up to 4.4 per cent in 2017 and 4.7 per cent in 2018 on the back of a moderate recovery in Africa, Latin America and the Caribbean and Western Asia.
 
The report noted that fragilities in the banking sector and stressed balanced sheets of corporates remain important challenges for some economies. It cited the Indian government's commitment to a $ 3.7 billion package to recapitalise state-owned banks, saying various regulations have been introduced in order to reduce banks' financial exposures and to encourage private participation in the banking sector.

"Although countries should try to avoid a sudden tightening of monetary and liquidity conditions in the outlook period, policy measures will critically depend on the evolution of external factors, such as oil prices," it said.





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