Friday 31 / January / 2025
From Lalit K Jha
Washington, Jan 11 (PTI) The World Bank on Wednesday cut
India's GDP growth for 2016-17 fiscal to 7 per cent from its
previous estimate of 7.6 per cent citing the impact of
demonetisation, but forecast that the country would regain
momentum in the following years with a growth of 7.6 per cent
and 7.8 per cent due to a reform initiatives.
"The immediate withdrawal of a large volume of currency
in circulation and subsequent replacement with new notes
announced by the government in November contributed to slowing
growth in 2016," the World Bank said in its report, the first
after the government junked high-value curriencies on November
8.
In its first report after November's demonetisation, the
World Bank said, "Indian growth is estimated to have
decelerated to a still robust 7 per cent (in fiscal 2017
ending on March 31, 2017), with continued tailwinds from low
oil prices and solid agricultural output partly offset by
challenges associated with the withdrawal of a large volume of
currency in circulation and subsequent replacement with new
notes."
Notably, India maintains the distinction of being the
fastest growing emerging market economies of the world,
bypassing China.
"India is expected to regain its momentum, with growth
rising to 7.6 per cent in Fiscal Year (FY) 2018 and
strengthening to 7.8 per cent in FY 2019-20," the Bank said,
adding that various reform initiatives are expected to unlock
domestic supply bottlenecks and raise productivity.
Infrastructure spending should improve the business
climate and attract investment in the near-term, it added.
"The 'Make in India' campaign may support India's
manufacturing sector, backed by domestic demand and further
regulatory reforms. Moderate inflation and a civil service pay
hike should support real incomes and consumption, assisted by
bumper harvests after favourable monsoon rains," the Bank said
in its latest report Global Economic Prospects.
"A benefit of 'demonetisation' in the medium-term may be
liquidity expansion in the banking system, helping to lower
lending rates and lift economic activity," it said.
Noting that in India, cash accounts for more than 80 per
cent of the number of transactions, the World Bank observed
that in the short-term, 'demonetisation' could continue to
disrupt business and household economic activities, weighing
on growth.
"Further, the challenges encountered in phasing out large
currency notes and replacing them with new ones may pose risks
to the pace of other economic reforms (e.g. Goods and Services
Tax, labour, and land reforms)," it said.
"Spillovers from India to Nepal and Bhutan, through trade
and remittances channels, could also negatively impact growth
to these neighbouring smaller economies," the Bank noted.
According to the Bank, India's growth in the first half
of FY 2017 was underpinned by robust private and public
consumption, which offset slowing fixed investment, subdued
industrial activity and lethargic exports. MORE PTI LKJ
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sector salary and pension increases, and favourable monsoon
rains, which boosted urban and rural incomes, it said adding
that economic activity also benefited from a pickup in foreign
direct investment (FDI) and an increase in public
infrastructure spending.
"Unexpected "demonetisation'-the phasing out of
large-denomination currency notes which were subsequently
replaced with new ones-weighed on growth in the third quarter
of FY2017," the World Bank said.
Weak industrial production and manufacturing and services
purchasing managers’ indexes (PMI), further suggest a set back
to activity in the fourth quarter of FY 2017, it added.
"For the whole of FY 2017, growth is expected to
decelerate to a still robust 7.0 per cent."
In its report, the Bank said there has been slowdown in
investment in South Asia.
"In India, gross fixed capital formation has been on a
downward trend since 2011, with a shift in the composition
from private to public," it said.
While public investment rose by 21 per cent in FY2016,
private investment (which accounts for two-thirds of the
total) contracted by 1.4 per cent, reducing overall investment
growth to four per cent.
Infrastructure demand is expected to go up to USD1
trillion under the 12th Five-Year Plan (2012-2017).
"Going forward, public and private investment should be
supported by higher allocations in the FY2017 federal
government budget to build and upgrade infrastructure, and the
setup of a USD3 billion National Investment and Infrastructure
Fund," it said.
According to the Bank, India's steep private investment
slowdown has been attributed to several factors. The need to
unwind excess capacity built during the pre-financial crisis
growth boom amid weak external demand (eg in the manufacturing
sector) has discouraged new projects and caused investors to
shelve existing projects, it said.
"Second, policy uncertainty has been a factor," it said.
For example, the stalled Land Acquisition Bill has
extended project development timelines.
Lack of federal and state government coordination, on
compensation for land acquisition and environmental
clearances, has contributed to cost and time overruns.
Also lenders have been less willing to finance
overleveraged corporates, especially in infrastructure related
sectors (eg power and other utilities, steel, and cement
firms).
In particular, the Reserve Bank of India's 2015 corporate
governance reforms in state-owned banks (which represent
two-thirds of the total banking sector lending) has adversely
affected lending to leveraged corporates and conglomerates,
the report said. PTI LKJ
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