ECONOMIC SLOWDOWN

Indian economy lose sheen in latest IMF, World Bank reports

INDIA-ECONOMY-TAXATION-GST Both the financial institutions attributed the slump in economic growth to demonetisation and introduction of the GST | File

Note ban, GST uncertainties affect India's economic momentum

Despite Finance Minister Arun Jaitley's reiterating on a "far more stronger Indian economy" post demonetisation and GST reforms, the latest World Bank and IMF reports failed to project a strengthening economy.

While the IMF on Tuesday lowered India's growth projection to 6.7 per cent in 2017, 0.5 percentage points less than its previous two forecasts and slower than China's 6.8 per cent, the World Bank projected a growth slowdown from 8.6 per cent in 2015 to 7.0 per cent in 2017. "Real GDP growth slowed to 7.1 per cent in 2016, from 8 per cent in 15/16, and further to 5.7 per cent in Q1 FY2017," the World Bank said.

Both the financial institutions attributed the slump in economic growth to demonetisation and introduction of the GST.

The International Monetary Fund (IMF) raised its current year growth forecast for China to 6.8 per cent, 0.1 percentage more than its two previous projections in April and July—pushing the Communist giant above India at the top of the global growth tally.

It also lowered India's growth for 2018 to 7.4 per cent, 0.3 percentage points less than its previous two projections in July and April.

India's growth rate in 2016 was 7.1 per cent, which saw an upward revision of 0.3 percentage points from its April report.

"In India, growth momentum slowed, reflecting the lingering impact of the authorities' currency exchange initiative as well as uncertainty related to the midyear introduction of the country-wide Goods and Services Tax," the IMF said in its latest World Economic Outlook report.

"Strong government spending and data revisions in India led to an upward revision of 2016 growth to 7.1per cent (6.8per cent in April), with upward revisions of about 0.2percentage point, on average, for 2014 and 2015," it said.

While sustained growth is expected to translate to continued poverty reduction, more focus could be made to help benefit the informal economy more, said the World Bank report. A slowdown in India's growth rate, the bank said, has also affected the growth rate of South Asia. As a result, South Asia has fallen to second place after East Asia and the Pacific.

Hit hard by demonetisation, India lost the tag of the fastest growing economy to China in the March quarter with a GDP growth of 6.1 per cent, as per the data released by the Indian government's Central Statistics Office (CSO).

However, India is likely to regain the tag of the fastest growth emerging economies of the world in 2018, with China projected to grow at 6.5 per cent in 2018, the IMF said.

Optimistic future

For the year 2022, the IMF has projected a growth rate of 8.2 per cent, as against its growth projection of 6.7 in 2017 and 7.4 in 2018.

The GST, which promises the unification of India's vast domestic market, is among several key structural reforms under implementation that are expected to help push growth above eight per cent in the medium term, the IMF report said. "In India, simplifying and easing labour market regulations and land acquisition procedures are long-standing requirements for improving the business climate," the report said.

According to the World Bank, the GST is expected to disrupt economic activity in early 2018, but has momentum to pick-up.

Evidence suggests that post-GST manufacturing and services contracted sharply, it said adding that however, activity is expected to stabilise within a quarter maintaining the annual GDP growth at 7.0 per cent in 2018.

Growth is projected to increase gradually to 7.4 per cent by 2020, underpinned by a recovery in private investments, which are expected to be crowded-in by the recent increase in public capex and an improvement in the investment climate (partly due to the passage of GST and Bankruptcy Code, and measures to attract FDI), the bank report said.

The most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments such as corporate debt overhang, regulatory and policy challenges, along with the risk of an imminent increase in US interest rates, it said.

On the one hand, public and private consumption gained pace: after implementation of the 7th central pay commission recommendations; and due to the revival in rural demand after normal monsoon and agricultural impetus. However, overall demand slowed as public investments started to wane.

"If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India's potential growth," the report said. Downside risks to the global economy and accordingly to export growth and capital flows are also substantial given the possibility of monetary policy normalisation in the USA and risks of protectionism, it added.

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