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HomeEconomyWorld Bank cuts India's growth projection to 6%, behind Bangladesh & Nepal

World Bank cuts India’s growth projection to 6%, behind Bangladesh & Nepal

According to World Bank estimates for 2019, real GDP growth is projected to be 8.1% in Bangladesh, 6.5% in Nepal.

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Washington: After a broad-based deceleration in the initial quarters of this fiscal year, India’s growth rate is projected to fall to 6 per cent, the World Bank said on Sunday.

In 2018-19, the growth rate of the country stood at 6.9 per cent.

However, the bank in its latest edition of the South Asia Economic Focus said the country was expected to gradually recover to 6.9 per cent in 2021 and 7.2 per cent in 2022 as it assumed that the monetary stance would remain accommodative, given benign price dynamics.

The report, which has been released ahead of the annual meeting of the World Bank with the International Monetary Fund, noted India’s economic growth decelerated for the second consecutive year.

In 2018-19, it stood at 6.8 per cent, down from 7.2 per cent in the 2017-18 financial year.

While industrial output growth increased to 6.9 per cent due to a pick-up in manufacturing and construction activities, the growth in agriculture and the services sector moderated to 2.9 and 7.5 per cent, respectively.

In the first quarter of 2019-20, the economy experienced a significant and broad-based growth deceleration with a sharp decline in private consumption on the demand side and the weakening of growth in both industry and services on the supply side, the report said.

Reflecting on the below-trend economic momentum and persistently low food prices, the headline inflation averaged 3.4 per cent in 2018-19 and remained well below the RBI’s mid-range target of 4 per cent in the first half of 2019-2020. This allowed the RBI to ease monetary policy via a cumulative 135 basis point cut in the repo rate since January 2019 and shift the policy stance from neutral to accommodative , it said.

The World Bank report also noted that the current account deficit had widened to 2.1 per cent of the GDP in 2018-19 from 1.8 per cent a year before, mostly reflecting a deteriorating trade balance.

On the financing side, significant capital outflows in the first half of the current year were followed by a sharp reversal from October 2018 onwards and a build-up of international reserves to USD 411.9 billion at the end of the fiscal year.

Likewise, while the rupee initially lost ground against the USD (12.1 per cent depreciation between March and October 2018), it appreciated by about seven per cent up to March 2019, the report said.

“The general government deficit is estimated to have widened by 0.2 percentage points to 5.9 per cent of the GDP in 2018-19. This is despite the central government improving its balance by 0.2 percentage points over the previous year. The general government debt remained stable and sustainable – being largely domestic and long term-at around 67 per cent of GDP, the report said.

According to the World Bank, poverty has continued to decline, albeit possibly at a slower pace than earlier. Between 2011-12 and 2015-16, the poverty rate declined from 21.6 to 13.4 per cent (USD 1.90 PPP/day).


Also read: Minister RS Prasad dismisses economic slowdown, says 3 films earned Rs 120 crore on 2 Oct


The report, however, said disruptions brought about by the introduction of the GST and demonetisation, combined with the stress in the rural economy and a high youth unemployment rate in urban areas may have heightened the risks for the poorest households.

The significant slowdown in the first quarter of the fiscal year and high frequency indicators, thereafter, suggested that the output growth would not exceed 6 per cent for the full fiscal year, the bank said.

The report said the consumption was likely to remain depressed due to slow growth in rural income, domestic demand (as reflected in a sharp drop in sales of automobiles) and credit from non-banking financial companies (NBFCs).

However, the investment would benefit from the recent cut in effective corporate tax rate for domestic companies in the medium term, but also will continue to reflect financial sector weaknesses, the report said.

“Growth is expected to gradually recover to 6.9 per cent in 2020-21 and 7.2 per cent in 2021-22 as the cycle bottoms-out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. However, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand,” the report said.

The main policy challenge for India is to address the sources of softening private consumption and the structural factors behind weak investment, the bank said.

“This will require restoring the health of the financial sector through reforms of public sector banks’ governance and a gradual strengthening of the regulatory framework for NBFCs, while ensuring that solvent NBFCs retain access to adequate liquidity.

“It will also require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowd-out the private sector, it said.

According to the bank, the main sources of risk included external shocks that result in tighter global financing conditions, and new NBFC defaults triggering a fresh round of financial sector stress.

To mitigate these risks, the authorities would need to ensure that there was adequate liquidity in the financial system while strengthening the regulatory framework for the NBFCs, the bank added.


Also read: Raghuram Rajan says India losing its economic way, fiscal deficit ‘conceals’ a lot


Bangladesh, Nepal ahead of India: World Bank report

Bangladesh and Nepal are estimated to grow faster than India in 2019, according to the World Bank, which said that overall growth in South Asia is projected to slow down this fiscal in line with a global downward trend.

Pakistan’s growth rate is projected to deteriorate further to a mere 2.4 per cent this fiscal year, as monetary policy remains tight, and the planned fiscal consolidation will compress domestic demand, it said.

Growth in South Asia is projected to fall to 5.9 per cent in 2019, down 1.1 percentage points from April 2019 estimates, casting uncertainty about a rebound in the short term, the World Bank said in its latest report.

The latest edition of the South Asia Economic Focus, Making (De)centralization Work, finds that strong domestic demand, which propped high growth in the past, has weakened, driving a slowdown across the region.

Imports have declined severely across South Asia, contracting between 15 and 20 per cent in Pakistan and Sri Lanka.

In India, domestic demand has slipped, with private consumption growing 3.1 per cent in the last quarter from 7.3 per cent a year ago, while manufacturing growth plummeted to below 1 per cent in the second quarter of 2019 compared to over 10 per cent a year ago.

“Declining industrial production and imports, as well as tensions in the financial markets reveal a sharp economic slowdown in South Asia,” said Hartwig Schafer, World Bank Vice President for the South Asia Region.

“As global and domestic uncertainties cloud the region’s economic outlook, South Asian countries should pursue stimulating economic policies to boost private consumption and beef up investments, he said.

The report noted that South Asia’s current economic slowdown echoes the decelerating growth and trade slumps of 2008 and 2012.

With that context in mind, the report remains cautiously optimistic that a slight rebound in investment and private consumption could jumpstart South Asia’s growth up to 6.3 per cent in 2020, slightly above East Asia and the Pacific and 6.7 per cent in 2021.

In a focus section, the report highlights how, as their economies become more sophisticated, South Asian countries have made decentralisation a priority to improve the delivery of public services.


Also read: Deep retail gloom – the common crisis India and China are struggling to battle


“Decentralisation in South Asia has yet to deliver on its promises and, if not properly managed, can degenerate into fragmentation, said Hans Timmer, World Bank Chief Economist for the South Asia Region.

“To make decentralisation work for their citizens, we encourage South Asian central governments to allocate their resources judiciously, create incentives to help local communities compete in integrated markets, and provide equal opportunities to their people, Timmer said.

In India, growth is projected to fall to 6.0 this fiscal year. Growth is then expected to gradually recover to 6.9 per cent in fiscal year 2021 and to 7.2 per cent in the following year.

In Bangladesh, the real GDP growth is estimated at 8.1 per cent in 2019, up from 7.9 per cent in 2018, the report said, adding that the country’s growth is projected at 7.2 per cent in 2020 and 7.3 per cent in 2021.

The garment industry of Bangladesh has benefitted immensely from the ongoing trade tensions between the US and China, Timmer said.

“In general, what we see in high frequency data is that Bangladesh is doing better than the rest of the region, especially than India, Sri Lanka and Pakistan. We see that in industrial production, we see that in exports,” he said.

“So that confirms the story that has been told now many times that the garment industry in Bangladesh is doing very well and very likely that industry has benefited from the trade tensions between the US and China. Interestingly, it’s not just to the US or China, but also to other countries that they have very strong export performance, Timmer said.

In Nepal, GDP growth is projected to average 6.5 per cent over this and next fiscal year, backed by strong services and construction activity due to rising tourist arrivals and higher public spending.

In Afghanistan, with improved farming conditions and assuming political stability after the elections, growth is expected to recover and reach 3 per cent in 2020 and 3.5 per cent in 2021. In Bhutan, GDP growth is expected to jump to 7.4 per cent this fiscal year. In Maldives, growth is expected to reach 5.2 per cent in 2019.

In Sri Lanka, growth is expected to soften to 2.7 per cent in 2019. However, supported by recovering investment and exports, as the security challenges and political uncertainty of last year dissipate, it is projected to reach 3.3 per cent in 2020 and 3.7 per cent in 2021.

“Pakistan’s economy is slowing as the country passes through yet another macroeconomic crisis with high twin deficits and low international reserves. With an IMF Extended Fund Facility supported stabilization program in place, growth is expected to remain low in the near-term,” the report said.

“Obviously, the tensions are problematic for the whole region, but as we set off a year ago, the lack of integration into international markets is not just because of a lack of regional integration. Like India, Pakistan is underperforming in all markets and in the world,” Timmer said.


Also read: Bank credit growth rate slows to single digit for the first time this fiscal


 

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1 COMMENT

  1. I feel deep affection for Nepal. As happens with several middle class Indians, it was the first “ foreign “ country I visited. So it is deeply saddening that we have lost Nepal to our foremost adversary. The blockade came between the earthquake and the onset of winter. It would have been a small matter to create a mechanism for exchange of the Indian currency notes Nepalis have used for generations. Anyway, I am happy that Nepal is doing well. Its incredibly brave people – whom I consider our brothers and sisters – deserve all the good fortune they can create with their effort and enterprise.

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