World Bank Reduces India’s GDP Growth Forecast To Lowest In 13 Quarters; Demonetisation, GST Primary Reasons
October 13th, 2017
The World Bank released on Monday the South Asia Economic Focus Fall 2017 ‘Growth Out of the Blue’ report which reduced India’s GDP growth forecast to 7% for 2017-18 – the lowest level in 13 quarters.
Earlier, the financial institution had estimated a 7.2% growth forecast for 2017-18.
Contrastingly, South Asian countries of Bangladesh and Nepal have registered strong economic growth, even as South Asia could not retain its number one position. “South Asia forfeits the trend and is no longer the fastest-growing region in the world, with East Asia and Pacific back to top position,” says the report.
The slowdown is not happening across all countries in South Asia: it is driven by India, the region’s powerhouse, the report continued.
In the first quarter of 2016, India grew by 9%, but since then it’s growth has experienced a stepwise deceleration. It still grew above 7% during the rest of 2016, but growth slowed to 6.1% in the June quarter of this year and to 5.7% in the second.
However, the report also projects that by 2019-20, the Indian economy will grow at 7.4%.
By now India is neither the fastest-growing economy in South Asia nor the fastest growing large economy in the world anymore, said the report. The top position is taken by China which grew by 6.9% in the second quarter of 2017. Over the same period, the other countries in South Asia saw their growth rates remain stable or increase. The acceleration was particularly strong in Nepal, as its economy rebounded from the earthquakes and the trade disruption of 2015.
Reasons for slow growth
The maximum deceleration in growth has been witnessed in the last quarter of 2017. The World Bank attributes this to a combination of three forces: demonetisation, the decline in public expenditure and GST.
It has been argued that demonetisation disrupted supply chains in manufacturing, with impacts that have only become apparent now. The decline in public expenditure is the aftermath of demonetisation, says the report, while, the complex transition to the new Goods and Services Tax (GST) regime might have encouraged a wait-and-see attitude.
While the above three forces remain the most important reasons for slow growth, the report mentions that growth had been decelerating for several quarters before demonetisation. Over this period, there has been a clear reversal of fortunes between private investment and public spending. Imports increased sharply while private investment declined.
Pointing out challenges now faced by India, the World Bank said that “most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments,” adding, “If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India’s potential growth.
Similar forecast by IMF, ADB
For 2018-19, the International Monetary Fund (IMF) cut down India’s growth projections to 6.7%. “In India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the mid-year introduction of the countrywide Goods and Services Tax,” the report said.
In its Asian Development Outlook 2017 released last month, the Asian Development Bank (ADB) also made a downward revision of India’s growth. “India’s GDP growth is downgraded to 7% in the financial year 2017-18, a 0.4 percentage point drop from the April forecast. In the financial year 2018-19, the forecast is adjusted down to 7.4%, from 7.6%,” the report said.
However, ADB said that the newly implemented GST regime will prove beneficial in the long run and make India one of the most dynamic and competitive economies.
Defending demonetisation and GST, finance minister Arun Jaitley, said, “These are institutional reforms. These are structural changes. And these structural changes, I think have put the Indian economy on a far more soundtrack so that we can look forward to a much cleaner much bigger Indian economy in the days and years to come,” adding, “consistent steps have been taken to formalise and expand the more formal economy as far as India is concerned. And wanting to formalise that economy, one after the other steps are taken against shadow economy. Some of these steps, the demonetisation, the GST because the GST could lead to de-stocking of existing stocks can have for a quarter or so a transient impact on manufacturing. But in the long run, these are institutional reforms and structural changes,” reported The Indian Express.
The World Bank report comes after India’s GDP growth unexpectedly plunged to a three-year low to 5.7%. In August, the RBI’s Consumer Confidence Survey (CCS) also revealed that Indians are pessimistic across all economic parameters of the current government.
Read the full World Bank report here.