Login Register
Follow Us

World Bank upbeat about India’s economy

THE latest World Bank report on global economic prospects for 2019 makes ominous predictions for the short- and medium-term future.

Show comments

Sushma Ramachandran
Senior Financial Journalist

THE latest World Bank report on global economic prospects for 2019 makes ominous predictions for the short- and medium-term future. Speaking of storm clouds on the horizon, it describes growing international trade tensions that could impact investments in both developed and emerging economies. A possible deceleration of growth in many economies is on the cards, says the report, despite the fact that the world economy was literally firing on all cylinders at the beginning of 2018. Now, it predicts a growth of 2.9 per cent for the entire world in 2019 as against 3 per cent in the previous year. It does mention exceptions to the bleak prospects, which include India. But it warns that economies relying on commodities may face a setback and even the current spell of low inflation could alter in case central bank independence is eroded in the face of pressure to finance governments.

The Bank’s report resonates in this country, rocked as it has been recently by controversies over the central bank’s independence and the achievement of low inflation being marred by farmers’ distress due to low agricultural prices. At the same time, the bank is upbeat as far as India is concerned. It expects growth to rise to 7.3 per cent during 2018-19, making it the fastest growing economy on the planet. It goes on to add that the pace will pick up to 7.5 per cent in the following two years. China, on the other hand, is projected to slow down to 6.3 per cent. The region of fast growth now seems to have shifted to South Asia. Only Pakistan lags with an expected slowing to 3.7 per cent.

On India, the Bank makes some interesting observations about demonetisation and the launch of the Goods and Services Tax (GST) regime. It notes that both developments led to slower growth in 2017. It also contends that these encouraged a shift from the informal to the formal economy. In this context, the Bank highlights the need to reduce the element of the informal sector in emerging economies. It maintains that a large informal sector is often associated with lower productivity, reduced tax revenues and greater poverty and inequality. In other words, while both demonetisation and GST had led to lower growth, these also had a positive impact by way of reducing the informal economy.

Demonetisation, which caused extreme hardships to the weaker sections of society, especially in rural areas, has also been decried due to the fact that most of the currency was returned to the central bank. The Bank, on the other hand, has only viewed the measure from the aspect of helping the shift from the informal to the formal economy, as it points out that workers in the latter sector earn 19 per cent more than those in the former. The introduction of GST is viewed through the same prism, though this too has been criticised for being launched without adequate preparation, leading to considerable hardship for small businesses. One must point out, however, that GST was a reform whose time had come and no amount of preparation would have enabled a smooth rollout. First, states were holding on jealously to their individual revenue flows without taking a macro-economic view; second, small traders and businesses would not have shifted to much-needed digitisation before it was actually launched. The initial glitches are being ironed out.

The Bank has commended the containment of inflation in emerging economies to 3.5 per cent, saying that it is linked to greater output, higher growth and better development. Its comments on low inflation are significant as one of the big achievements of this government has been curtailing price rise. This is despite hardening of world crude oil prices in the past two years that led to enhanced retail prices of petroleum products. Even so, it was possible to keep inflation within the parameters laid down by the Reserve Bank of India (RBI). One of the reasons for attaining these goals, however, was the stagnation in agricultural product prices which occurred paradoxically owing to successive bountiful harvests. The presence of huge food surpluses, in turn, led to agrarian distress in many states. Hence, containing inflation needs to be accompanied by reformative policies in key sectors of the economy.

Similarly, the issue of the central bank independence, highlighted in the World Bank’s report, has become a key issue of discourse in recent months. The abrupt resignation of Urjit Patel as RBI Governor following disagreements with the Central Government appeared to show that all was not well on this front. As far as independence is concerned, it is clear this cannot be stretched beyond a point, though tensions between the RBI and the government have been of a healthy nature in the past. Even a former RBI Governor is now saying the central bank is accountable to the government and needs to work within the framework laid down by it. 

The World Bank’s latest report is thus not only timely, but also highlights many issues that have come to the fore here in recent months. The aspect of higher growth remains paramount, however, as the Bank notes that higher consumption and investment have been the drivers for acceleration this year. It can only be hoped that the brighter skies on the horizon translate into a consistently high growth path for the economy over the next few years.

Show comments
Show comments

Top News

Most Read In 24 Hours