India’s growth rate forecast cut down to 6% by World Bank. In April, the World Bank had predicted India’s growth rate at 7.5%. However, India’s economic growth declined in the past two years. In 2018-19 growth rate was 6.8% against 7.2% in 2017-18. In addition, RBI also cut India’s growth forecast to 6.1% from 6.9% earlier.
Decline in Private Consumption
Domestic consumption is expected to remain depressed owing to slow growth of rural areas and weakening of supply industries.
In 2018-19 the average headline inflation was 3.4%. The headline inflation was below the mid-range target of 4% in first half of 2019-20. Due to this RBI cut the repo rates to ease monetary policy through 135 cumulative basis point. It also changed the policy stance to accommodative from neutral.
The World Bank report observed that one of the major challenges for India would be to softening of private consumption.
Fiscal Deficit and Higher Borrowings
The report stated that fiscal deficit widened to 2.1% of the GDP in 2018-19 from 1.8% in 2017-18.
The output growth expected to be less than 6% for the full fiscal year owing to slowdown and high frequency indicators.
World bank suggested that to improve the situation, “It will require efforts to contain fiscal slippages, as higher-than-expected public borrowings could put upward pressure on interest rates and potentially crowd out the private sector.”
World bank pointed out that higher public borrowing would stress interest rates and may bring new defaulters. Reforms in Public sector banks would improve condition of financial sector in India. In addition, strengthening of regulatory framework of NBFCs would also solve the current crisis. Currently NBFCs require adequate capital to resolve liquidity crises in the sector.
Growth Expected to Recover
In the latest edition of the South Asia Economic Focus the World Bank said that the India’s growth is likely to recover 6.9% in 2020-21 and 7.2 % in 2021-22. Growth is expected to recover due to reforms in taxes such as corporate taxes cut, income support schemes and increase in credit growth.