Low agricultural demand, poor export, import scenarios "weak spots" in India's growth outlook: World Bank

 

By Our Representative
Despite the prediction that the Indian economy would grow by 7.7 per cent next year, the World Bank in its latest report, “South Asia Economic Focus Spring 2016: Fading Tailwinds” has regretted that “private consumption growth” in the country has been driven “by non-agricultural (largely urban) households, as rural areas have been under stress.”
Blaming it on what it calls “two sub-par monsoons and declining underground water levels in North India that depressed agricultural output”, the report reasons how the purchasing power of the rural areas in the country has just failed to pick up.
It says, “Increases in minimum support prices have steadily decelerated, and construction sector growth moderated. On the other hand, reliance on the rural employment guarantee scheme (MNREGA) has increased, reflecting latent demand for employment opportunities in rural areas.”

Claiming that “economic activity” in India “is expected to accelerate gradually”, the report believes, much would depend on “a rebound in agriculture on the expectation of a normal monsoon in 2016.”
Pointing out that the private consumption growth, which is largely an urban phenomenon, might accelerate, and the “stimulus” would be provided by “civil service pay revisions”, with the Central seventh pay commission recommending a big hike, the report believes, if this happens, there would be a “broad-based consumption growth in financial year 2017”, offsetting “continued weakness in exports and private investment.”
“Overall, India’s real GDP growth for FY2015 is estimated at 7.4 percent”, the World Bank says, adding, “A continuation of this solid performance requires strong private investment, on the back of an expected push in infrastructure spending, an improved investment climate, and less leveraged corporate and financial balance sheets.”

The report notes, while the “fixed investments accelerated from average 4.1 percent in FY13-FY14 to 5.2 percent during the first nine months of FY15-16”, “recent gains were largely due to a revival in public investment as private investment remains weak.”
It particularly emphasizes that “exports contracted (-6.5 percent y/y in the first three quarters of financial year 2016) due to the slowdown in emerging market growth and India’s declining global market share of exports.”
At the same time, it says, “Domestic demand provided little lift to imports, which contracted by 6.4 percent year-on-year during April-December”, predicting, “In later years, growth will be underpinned by private investments, which will be ‘crowded-in’ by the push to accelerate infrastructure spending, a better investment climate, and less leveraged corporate and financial balance sheets.”

While pointing out that “restarting private investments will be critical for sustained rapid growth”, the report believes, “private investment growth continues to face several impediments in the form of excess global capacity, corporate debt overhang and stresses in the financial sector, in addition to regulatory and policy challenges.”
“In the absence of investments and resulting expansion of production capacity, not only faster growth may not materialize, but inflationary pressures could build up in the medium term”, the report says.
It adds, “Realizing the meaningful and sustainable pick-up in investments requires effective implementation of reforms along many fronts: from infrastructure investments, to cleaning up banks’ balance sheets and building ‘institutional capital,’ which are the policies and institutions that enable private investments – e.g. goods and services tax (GST), land acquisition, and insolvency.”

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