New Delhi: India’s real Gross Domestic Product (GDP) in the current fiscal year is is expected to grow by 8.3%, aided by an increase in public investment and incentives to boost manufacturing, according to the latest report from the World Bank.
“Real GDP in the current fiscal year is expected to grow by 8.3%, which is consistent with the last forecast from June 2021, and a 1.8 percentage point downward revision from the forecast in March 2021,” said the World Bank’s Fall 2021 economic update for South Asia. Growth is forecast to moderate to 7.5% next year. The Reserve Bank of India estimates GDP growth to be 9.5% in the current fiscal year while government officials say it could be closer to 10% given the sharp recovery that is underway. The acceleration in vaccination has also lent comfort to a more sustained recovery.
Despite being ravaged by a second Covid-19 wave earlier this year, the economic impact of the pandemic this year has been “relatively small” compared to the impact in 2020, said the report, titled, ‘Shifting Gears: Digitization and Services-Led Development’. It said that the projected growth is supported by an increase in public investment to boost domestic demand and production-linked incentive schemes to boost manufacturing.
“Over the next two years, as the base effect fades, growth is expected to stabilize at around 7%, aided by structural reforms to ease supply-side constraints and infrastructure investment. In the medium term, uncertainty around asset-quality deterioration from the pandemic, higher-than-expected inflation, and slow recovery in the informal sector are the main downside risks,” according to the report.
Hans Timmer, World Bank’s chief economist for South Asia said the current GDP growth projection of 8.3% is in line with a global report (Global Economic Prospects) that the World Bank published in June of this year, after the health crisis.
“Recent economic data are still consistent with that number, in our view. Throughout the pandemic, we have used a range for India’s growth this year from 7.5% – 12.5%%, because of the uncertainties. The latest numbers indicate that we are at the lower end of that range,” Timmer told TOI over email.
He said the main risk for India is the fragility of the financial sector. “Some of the risks in the financial sector are hidden by the support measures, but a potential rise of non-performing loans is of concern. A second risk is another COVID-19 wave with new variants emerging. That is why it is so important to further accelerate the vaccination program. A third risk that we are analyzing in the report is a loss of momentum in the global economy,” said Timmer.
“I have no prediction of if and when RBI will tighten interest rates. It will obviously depend on developments in global financial markets and on monetary policy changes in major developed economies. It might also depend on inflation numbers, but at the moment inflation doesn’t show strong evidence of excess domestic demand. It is more the expression of rising energy prices globally and some remaining disruptions in global value chains,” the World Bank chief economist for South Asia said when asked about RBI’s interest rate move.
He said The RBI has been very accommodative, and rightfully so.
Not just with their interest rate, but also with regulatory forbearance measures and liquidity injection. This all to help firms survive the crisis period,” said Timmer.
The latest South Asia Economic Focus titled Shifting Gears: Digitization and Services-Led Development projects the region to grow by 7.1% in 2021 and 2022. While the year-on-year growth remains strong in the region, albeit from a very low base in 2020, the recovery has been uneven across countries and sectors. South Asia’s average annual growth is forecast to be 3.4% over 2020-23, which is 3 percentage points less than it was in the four years preceding the pandemic.
“As countries build back, they have a chance to rethink their long-term development models. With the emergence of new digital technologies, South Asia has an opportunity to shift gears from a traditional manufacturing-led growth model and capitalize on the potential of its services sector,” according to the report.
“The role of services in the region’s economy has been increasing amid rapid technological change and the accelerated structural transformation of global economic activity in response to the pandemic. The adoption of digital technologies makes services more tradable, enables services to increase the productivity of other sectors—including manufacturing—and creates new markets. Some South Asian countries are increasingly providing business and professional services that add value to manufacturing and play a key role in global value chains,” the report added.