World Bank Growth forecast

Why in news?

• The World Bank has cut its 2016-17 economic growth forecast for India to 7% from 7.6%, citing a slowdown in consumption and manufacturing due to demonetisation, an ongoing decline in private investment and credit constraints due to impaired bank balance sheets.

What is the reason for the downgrade?

• Unexpected demonetisation has weighed on growth in the third quarter of FY2017.
• Weak industrial production and manufacturing and services purchasing managers’ indexes (PMI), further suggest a setback to activity in the fourth quarter of FY2017.
• This was further accentuated by other economic factors, leading to a slump in the entire year’s growth rate.
• A retrenchment of private investment, reflecting excess capacity, corporate deleveraging, and credit constraints due to impaired commercial banks’ balance sheets, also had an adverse effect on activity.

What are the reforms that can bring about growth rebound?

• The passage of the bankruptcy and insolvency code, the liberalization of FDI norms across sectors, the passage of the Goods and Services Tax (GST) Amendment Bill.
• The agreement between the government and the Reserve Bank of India on a monetary policy framework that included the setting up of a monetary policy committee and agreement on a flexible inflation target.
• Infrastructure spending should improve the business climate and attract investment in the near-term.
• 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 favorable monsoon rains.
• 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

Conclusion

The Indian economy is, however, set to recover its momentum subsequently, with growth projected to accelerate to 7.6% in FY18 and further strengthen to 7.8% in FY20, according to the World Bank’s Global Economic Prospects – January 2017 report.

Category: Mains | GS – III | Economics

Source: The Hindu