The Global Economic Prospects 2017 report brought out by the World Bank has taken a very contrarian stand. Even as the Central Statistical Organisation and other indicators, including the lead indicators brought out by the OECD, point to a sharp deceleration in growth the World Bank reports says that growth in the Indian economy has bottomed out in 2016 with the numbers sliding from 7.6% in 2015 to 7.1% in 2016 and that growth will recover to 7.6% in 2017 and further to 7.8% in 2018 and 2019.
The crux of the argument made in the World Bank report is that the reforms initiatives in India will reduce supply side bottlenecks and improve productivity to boost growth. True that the Indian government has taken far reaching reforms that will help boost domestic supply constraints. Some of the most recent ones would include the newly enacted bankruptcy and insolvency code, sweeping liberalisation of the FDI regime, ushering of the goods and services taxes and monetary policy which will help anchor inflation expectations.
Indeed these are all far reaching changes that is bound to significantly improve the efficiency in use of resources and boost productivity. In fact the report notes that India along with Cambodia are among the few Asian economies registering improved competitiveness and surely this would get a further boost once the reforms are rolled out on the ground. But the World Bank surely has failed to take into account the huge time lags in efficient implementation of reforms which has been the bane of policy makers for a long time now.
Another major drawback of the World Bank argument is it fails to assess the full impact of the increase in energy prices. As pointed out in the report one of the reasons for the consumption surge that boosted India’s growth was the fall in energy prices. World Bank estimates in fact show that international oil prices has now fallen for three years in a row; by 7.5% in 2014, 47.3% in 2015 and by 15.1% in 2016.
However it fails to note that only a small part of this fall in oil prices had been passed through to the Indian consumers. Moreover oil prices have started picking up again. World Bank estimates even show that oil prices would go up by 28.2% in 2017, 8.4% in 2018 and by 4.6% in 2019. Surely this would impact on costs and inflations levels and dampen consumption spending especially since the government cannot afford to cut energy taxes when it is already threatened by increased uncertainties about tax collections during the roll out phase of the goods and services tax.
Even this however does not fully refute the World Bank optimistic scenario of a pickup in India’s growth. This is because the World Banks forecasts also Indicates that the global recovery will give a big boost to international trade. In fact growth of global trade in volume terms is expected to go up from 2.5% in 2016 to 3.6% in 2017 and further to 4% in 2018.
This is a major inflexion point as this indicates that the weakening relationship between global growth and international trade is likely to be reversed with global trade increasing much faster than global growth. This is a surprising forecast especially when countries are drawing up their defenses against imports the world over. But a strong recovery in international trade would be a big boost to the Indian economy, especially since it has been starved off external demand impulses in recent years.
The other factor that would support the World Banks optimism about India is the prospects of a further pick up in foreign direct investments into India. This looks plausible especially in the context of the World Bank projections which show that the recovery would be elusive in high income economies like the EU and Japan. Even in the case of the USA the report expects growth to decelerate in the next two years. In such a scenario FDI inflows into India might get a big boost especially since it is one of the few place where increase in FDI inflows have given a fillip to economic activities. The World Bank also expects that the increase in bank deposits after the demonetisation exercise will help reduce interest costs which would also boost domestic private sector investments.
All these are highly plausible. But given the slump in the economy in the current fiscal year business confidence is at a low level. If the World Bank optimism is to fructify the government would have to roll out a slew of new measures to boost investors sentiment including in the next budget.