IMF, World Bank optimistic about India’s growth rate

In its bi-annual World Economic Outlook, IMF kept its growth projections for India unchanged at 7.4% for 2018-19 and 7.8% for 2019-20.

business Updated: Apr 17, 2018 23:16 IST
Asit Ranjan Mishra and Yashwant Raj
Asit Ranjan Mishra and Yashwant Raj
Hindustan Times, New Delhi/Washington
IMF,World Bank,Growth rate
IMF kept its growth projections for India unchanged at 7.4% for 2018-19.(AFP File Photo)

The International Monetary Fund (IMF) on Tuesday said India should address labour market rigidities to create more jobs and undertake financial sector reforms to improve governance in public sector banks to contain downside risks to its medium-term growth prospects.

In its bi-annual World Economic Outlook, IMF kept its growth projections for India unchanged at 7.4% for 2018-19 and 7.8% for 2019-20, holding that economic activity will be lifted by strong private consumption as well as fading transitory effects of demonetisation and implementation of the Goods and Services Tax. “Over the medium term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment,” it added.

The IMF’s forecast came after the World Bank, in its bi-annual South Asia Economic Focus report released on Sunday, said the economy had recovered from the adverse impact of note ban and GST and is projected to grow by 7.3% in 2018 and 7.5% in 2019.

According to the IMF, global growth is projected to pick up to 3.9% this year and next, supported by strong momentum, favourable market sentiment, accommodative financial conditions, and the domestic and international repercussions of expansionary fiscal policy in the US. Over the medium term, global growth is projected to decline to about 3.7% due to a shift toward inward-looking policies that harm international trade and a potential further buildup of financial vulnerabilities that could give way to rapid tightening of global financial conditions, it warned.

Over the medium term, China’s growth is expected to gradually slow to 5.5% from 6.6% in 2018 with continued rebalancing from investment to consumption. “However, rising non-financial debt as a share of GDP and the accumulation of vulnerabilities weigh on the medium-term outlook,” IMF added.

IMF said while acceleration in India’s growth in the medium term will offset to China’s gradual slowdown, an important challenge for India is to enhance inclusiveness. “The main priorities for lifting constraints on job creation and ensuring that the demographic dividend is not wasted are to ease labor market rigidities, reduce infrastructure bottlenecks, and improve educational outcomes,” it said.

The multilateral lending institution said the balance sheet vulnerabilities in India pose a downside risk to its medium-term growth prospects, requiring policy action. “The corporate debt overhang and associated banking sector credit quality concerns exert a drag on investment in India. The recapitalization plan for major public sector banks announced in 2017 will help replenish capital buffers and improve the banking sector’s ability to support growth. However, recapitalization should be part of a broader package of financial reforms to improve the governance of public sector banks, and banks’ debt recovery mechanisms should be further enhanced,” it said.

The World Bank, in its report, said Indian recovery will lift South Asia as a region and make it the world’s fastest growing again, possibly even widening the lead over East Asia and the Pacific. It will drive South Asia growth to 6.9% in 2018 and 7.1% in 2019.

“South Asia had lost the lead as India decelerated for about five quarters, and now it is clear that India is bouncing back,” the Bank’s chief economist for South Asia Martin Rama said in an interview.

“The acceleration of growth that we see in the region is not necessarily that all countries in the region are doing much better, it’s a mixed picture, but given the size of India, India’s bouncing back is driving the growth,” he added.

But job creation is a concern. Despite growth, India is not creating enough jobs.

“India must create 8.1 million jobs a year to maintain its employment rate, which has been declining largely due to women leaving the job market,” the World Bank said.

The decline on account of women dropping out is “happening in areas that are borderline between urban and rural (and) as farming jobs disappear and other types of jobs do not appear,” said Rama.

India’s economy grew by an estimated 6.7% in 2017 as per the World Bank’s estimates (there are several counts, including one by India) and is forecast to grow by 7.3% in 2018, and 7.5% in both 2019 and 2020.

“I am very confident that India can deliver growth rates in the range of 7 to 8% for quite some time without much work, just keeping good policies … (but) the question is can it do more?” said Rama.

First Published: Apr 17, 2018 23:15 IST