Indian economy recovers from demonetization and GST : World Bank

The World Bank study revealed that Indian economy appears to have recovered from the temporary disruptions caused by demonetization and the introduction of the Goods and Services Tax (GST). However, it felt, domestic risks and a less benign external environment impact the macro-economic outlook.

World Bank has projected in its latest report on South Asia. Growth in India is expected to rise to 7.3% in fiscal year 2018/19, and to 7.5% in the following two years, with stronger private spending and export growth as the key drivers. Growth reached 6.7% in fiscal year 2017/18, with a significant acceleration in recent months, it said.

On the production side, the turnaround in the second half was led by manufacturing (that grew at 8.8% versus 2.7% in the first half). Agriculture growth improved, and services growth held steady at 7.7%, the report said. On the demand side, the pick-up in growth was reflected in a sharp acceleration in gross fixed capital formation to 11.7% in the second half, from 3.4% in the first. Consumption, growing at seven% in the second half, remained the major driver of growth, it added.

Observing that the external situation has become less favourable and the current account balance has deteriorated, the Bank said that a worsening trade deficit has led the current account deficit to widen — on the back of a strong import demand, higher oil prices and exchange rate depreciation — from a benign 0.7% of the GDP in fiscal year 2016/17 to 1.9% in fiscal year 2017/18.

The global lender cautioned that a widening trade deficit is likely to lead to a current account deficit of around 2.6% of the GDP in fiscal year 2018/19, and tighter global financing conditions will put added emphasis on India’s ability to attract Foreign Direct Investment (FDI).

Further, the World Bank states that fiscal consolidation is expected to resume in fiscal year 2018/19, but slippages could happen on both the revenue side (as the GST is still stabilising) and the expenditure side (ahead of state and federal elections).

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