India Economy: The World Bank Verdict: 7% Growth Ahead for India February 2014

India Economy: The World Bank Verdict: 7% Growth Ahead for India – February 2014

British High Commission New Delhi

Summary

In its latest Global Economics’ Prospect report, the World Bank projects a sharp improvement in India’s growth prospects in the coming years. From 4.8% in 2013, the economy has been projected to grow by over 6% in the next two years crossing 7% in 2016. In comparison, China and the East Asia-Pacific region are projected to have a relatively flat growth. This note focuses on the merits of these projections.

 Detail

 

The World Bank bases its view on three factors – (1) Expected recovery in global demand, and (2) Revival of investment cycle. (3) Eventual closure of the negative ‘output gap’.

 

On the face of it, the assumptions are not unfounded. Growth pick up in developed countries has already generated a strong momentum in India’s exports, and has contributed to a reduction in concerns over the current account deficit In fact, the World Bank maintains the correlation in its projections – India’s pick up in growth is not without similar projections for the developed world. High income economies have been forecast to grow sharply from 1.3% in 2013, to 2.2% in 2014 and consequently by 2.4% in the next two years. However, generally an improvement in the developed economy will almost certainly translate into withdrawal of global liquidity. While the sentiment has already translated into depressed capital flows to South Asia in 2013, the World Bank isn’t overly worried. Despite dearer liquidity conditions globally, private capital inflows are expected to steadily pick up in the coming years, adding at least $2–3 bn every year (from around $85 bn currently to $97 bn in 2015 and almost touching $110 bn in 2016).

 

The World Bank’s belief in the potential of India’s investment is also not misplaced India has not promoted investment as a part of its growth strategy to the same extent as some of its other Asian peers, in particular China. However, falling investment was one of the initial causes of the current slowdown in India. On the positive side, the slide came not from excess capacity, but due to supply side bottlenecks and institutional failures. The infrastructure deficit in India is still acute and hence presents strong potential for growth. Indeed, on digging deeper into the World Bank’s growth projections, fixed investments GDP is expected to grow from 3.5% in 2013 to over 6% in 2014, and almost 8% by 2015 and 2016. Is it improbable? Not really. India has previously seen even better investment performances – 9% in 2009, followed by over 16% in 2010. Essentially the crux of the World Bank argument seems to be the existence of a negative output gap for India. Crudely put, output gap is the difference between the current growth rate below the economy’s potential growth rate.

 

But there are widely acknowledged risks. Along with falling growth, India has seen high and persistent retail inflation and inflationary expectations (A negative output gap implies lower demand, and hence theoretically lower price pressures). Supply side bottlenecks, currency depreciation, fuel price normalisation and weak monetary policy transmission are to blame. High inflation eventually leads to negative real interest rates and reduction in financial savings, leading to increased demand for gold and A worsening current account deficit. It also erodes THE global competitiveness of Indian goods, nullifying the advantage that a depreciating currency offers to the export sector. Slowing growth has taken a toll on the fiscal deficit, which is currently on course to breach its target. Another victim has been the distressed assets of the Indian banking sector – gross non-performing and restructured loans currently accounts for over 10% of loans, with almost half of this in the non-performing category. Legal and institutional mechanisms need to be streamlined to revive the investment pipeline, as well as to improve the general business environment.

 

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Countries: India
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