World Bank warns of "high uncertainty" over India's growth rate momentum, says downsize risks are "ample"

The World Bank’s latest report, “India Development Update”, has said that India may have taken advantage of the “sharp decline in global oil and commodity prices to eliminate petrol and diesel subsidies and increase excise taxes”, hence the country’s economic growth will “very likely remain above 7 percent in the next fiscal year”. However, it warns that “uncertainty about its momentum is high and downside risks ample.”
The Update says, in the “near term” India is relatively “well-positioned to weather the global volatility”, as “low trade exposure to China and considerable foreign exchange reserves provide ample buffer”, in the medium term, however, “the Indian economy is not immune to a slowdown in global demand and heightened volatility.”
Asking India to gear to “some measure of foreign capital inflows to finance both fiscal and current account deficits and ultimately the investments to spur growth”, the report states, this is particularly important as “China’s slowdown has further deteriorated India’s already weak export outlook.”
In fact, the World Bank believes, “Although India may be able to achieve fast GDP growth without export growth for a short period, sustaining high rates of GDP growth over a longer period will require a recovery of export growth.”
The Update says that resources from lower subsidies and higher taxes have been “well utilized” in lowering deficits and increasing capital expenditure, with the current account deficit narrowing to 3.4 percentage point between financial year (FY) 12-13 and FY 14-15 (fiscal year ending March 31), adding, “Capital expenditure increased by one third in the first six months of calendar 2015 compared to the previous year.”
However, it notes that “while public investments have helped kick-start the investment cycle, increased participation of the private sector will be required going forward.”
The Update, a twice yearly report on the Indian economy and its prospects, expects India’s economic growth to be at 7.5 percent in 2015-2016, followed by further acceleration to 7.8 percent in 2016-17 and 7.9 percent in 2017-2018. However, it says, “Acceleration in growth is conditional on the growth rate of investment picking up to 8.8 percent during FY2016-FY2018.”
“While progress is visible in several areas, including improvements in the ease of doing business, some key reforms, most notably the implementation of the Goods and Services Tax (GST) can be a potential game changer for India,” the report quotes Onno Ruhl, World Bank Country Director as saying.
The Update calls for three key domestic reforms: The first one relates to reforming the public sector banks, whose “poor and deteriorating asset-quality … is the biggest challenge facing the financial sector and a drag on credit growth”. Second, is the “continuing to improve the ease of doing business and enacting the goods and services tax (GST).” And third, “Enhancing the capacity of states and local governments to deliver public service as more resources are devolved from the centre.”

SCBs: Scheduled Commercial Banks; NPAs: Non-Performing Assets

“Public sector banks, which account for three-fourths of domestic credit, are under stress, with a rising share of non-performing. This restricts financing for private investment. Apart from the welcome capital injections and governance reforms that the Government is undertaking, ensuring a long-term solution to the debt overhang of infrastructure firms is needed to ensure sustainable financing,” the report quotes Frederico Gil Sander, Senior Country Economist and Task Team Leader of the India Development Update as saying.