World Bank lowers India’s growth forecast to 7%

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The World Bank has forecast and warned that subdued private investment due to internal bottlenecks could put downside pressures on the country’s potential growth to 7 percent in 2017 due to disruption in demonatisation & the GST.

Context

The International Monetary Fund has also lowered India’s growth projection to 6.7 percent in 2017, 0.5 percentage points less than its previous two forecasts and slower than China’s 6.8 per cent.

The World Bank said in its South Asia Economic Focus that India’s economic momentum has been affected by disruptions from the withdrawal of banknotes and uncertainties around the Goods and Services Tax (GST).

The report released ahead of the annual meeting of the International Monetary Fund and the World Bank states that  sustained growth is expected to translate to continued poverty reduction, more focus could be made to help benefit the informal economy more.

A slowdown in India’s growth rate 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.

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 FY207.

After implementation of the 7th central pay commission recommendations public and private consumption gained pace. On the other hand, overall demand slowed as public investments started to wane.

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

The growth 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 percent 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 the GST and Bankruptcy Code, and measures to attract the 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.

The report also states that “If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India’s potential growth”.

 

 

 

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