World Bank too sees growth dip over GST, Demonetisation

| | Washington

A day after the International Monetary Fund cut India's growth forecast because of the ‘lingering impact’ of demonetisation (DeMo) and the Goods and Services Tax (GST) roll-out, the World Bank has followed suit, projecting a drop on account of the ‘disruptions’ and ‘uncertainties’ associated with the same two initiatives. “India's economic momentum has been affected from disruptions from the withdrawal of banknotes and uncertainties around the GST. Growth is expected to slow from 8.6 percent in 2015 to 7.0 percent in 2017,” the Bank said, noting that ‘sound policies around balancing public spending with private investment could accelerate growth to 7.3 per cent in 2018’.

Finance Minister Arun Jaitley, without explicitly reacting to the adverse projections by the two top multilateral financial institutions, put up a strong defence of the Narendra Modi Government's two major economic initiatives, asserting these far-reaching reforms have put India on a far stronger track. “These are institutional reforms. These are structural changes. And these structural changes, I think have put the Indian economy on a far more sound track so that we can look forward for a much cleaner and much bigger Indian economy in the days and years to come," he said at an event in Columbia University in New York. The IMF itself appeared to soften its grim forecast somewhat with its top economist Maurice Obstfeld commenting that India's projected downgrade may just be a "blip" on an otherwise longer-term positive picture. “In general, the state of India's economy is quite good. The government has energetically pursued structural reforms, including the GST which will have a payoff longer term,” Obstfeld, who is IMF's Economic Counsellor and Director of Research Department, told a news conference.

The World Bank's projection of 7 per cent growth in 2017, however, would appear to be less ominous than the IMF's forecast of 6.7 per cent by trimming its earlier projection of 7.3 per cent for the year. In its updated South Asia Economic Focus, the Bank noted that after leading global growth for two years, South Asia has fallen to the second place, after East Asia and the Pacific, adding: “The region's slowdown is due to both temporary shocks and longer-term challenges.”

“Given its weight in the region, India sets the pace for South Asia,” the Bank said. In addition to the effects from demonetisation and introduction of GST, it suggested that India's GDP was also expected to slow down because of surging imports and declining private investment. "While growth rates in South Asia largely remain robust given the economic shocks that some countries in the region have faced, countries should continue to actively address their growing trade and fiscal deficits," said Annette Dixon, Vice-President of the Bank's South Asia Region.

“With the right mix of policies to respond to challenges, we remain confident that South Asian countries can accelerate their growth to create more opportunities and prosperity for their people,” Dixon said. While commenting on the medium-term risks, the Bank report spoke of the continuing domestic impediments such as corporate debt overhang, regulatory and policy challenges, apart from the risk of an imminent increase in US interest rates.

“If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India's potential growth," it said. The Finance Minister, in the course his address to students at Columbia University, said that decisions such as demonetization and GST might have some short-term impact of a transient nature on manufacturing, but in the long-run these would put the country on a sound footing.

He derided those attacking the Government for springing a surprise on the country with the demonetization decision, remarking that while transparency is a nice world, transparency in this particular case would have turned out to be the ‘greatest instrument of fraud’. Stating that demonetization has had immense public support, Jaitley said it has paved the way for effectively managing a large part of the country's cash currency, doubling digital transactions and bringing a large number of people into the tax net.



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