World Bank differs with IMF on India turnaround
Oct 16 2013 , New Delhi
Pegs FY14 growth at 4.7% on recovery in H2
IMF is pessimistic with a projection of 4.25 per cent growth in 2013-14, reflecting its expectation of the economic slide continuing in the next six months. On the other hand, the World Bank’s estimate of 4.7 per cent means an added momentum to growth in the second half.
On Wednesday the Bank projected a pickup in India’s growth following good farm production, exports and higher manufacturing output. This will push up GDP growth to 6 per cent in January-March, the last quarter of this financial year, the Bank has said.
But the Bank and IMF agree that GDP growth will be much lower than last year’s 5 per cent. This, they say, is due to the poor showing in the first two quarters. Their latest projections for the entire year are lower than what they predicted earlier.
The Bank has said in its biannual update that India’s growth will continue to be subdued in July-September on account of the negative business sentiment and high interest rates.
But growth will bounce back in the second half, the Bank adds. Still, higher exports on account of a depreciating rupee, better agriculture production and a pickup in investments should boost the economy in the coming quarters, the update says.
Growth should further pick up in 2014-15 to 6.2 per cent, the Bank hopes.
“Although output growth in the first quarter fell to 4.4 per cent, growth is expected to rebound strongly in the second half with core inflation trending down, a bumper crop expected in agriculture and exports likely to benefit substantially from the rupee’s depreciation,” Martin Rama, the World Bank’s chief economist for South Asia, said.
Last week IMF cut India’s growth forecast to 4.25 per cent for this year and drew the ire of finance minister P Chidambaram, who questioned its projections and methodology.
“We do not share this pessimistic outlook. We also believe there is a need for reviewing the methodology for growth projections as IMF projections have often been at divergence with final growth numbers in the past,” the minister said.
The World Bank said that “high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances from the depreciation of the rupee” were factors that could impede growth.
A 5 per cent increase in the area sown would raise agricultural growth to 3.4 per cent from 1.9 per cent a year ago, Rama said, indicating that farm output would add to the growth push this year.
Rama said growth would further improve in the medium term, as strengthening exports would support a recovery in industrial activity and as new investment projects came on stream.
“India’s growth potential remains high but its macroeconomic vulnerabilities — high headline inflation, an elevated current account deficit and rising pressure on fiscal balances from the depreciation of the rupee — could impact the speed of economic recovery,” said Denis Medvedev, senior country economist of the World Bank for India.
With high savings and investment rate of around 30 per cent of GDP, the Bank’s economists felt that the economy was not growing to its full potential. They hoped that it was only a matter of time before the economy got back to high 7-8 per cent growth rates.
The Bank’s optimism tallies with the expectations of the finance ministry and C Rangarajan, chairman of the prime minister’s economic advisory council. The ministry expects GDP growth to be between 5 and 5.5 per cent; the council puts it at 5.3 per cent. They expect growth to be around 6.5 per cent next year. Chidambaram expects India to get back to 8 per cent growth in 2015-16.
India’s new RBI governor, Raghuram Rajan, too has been confident of better growth in the second half this year with exports and agriculture picking up and stalled projects going on stream. The slowdown was more pronounced last year when growth slid to 5 per cent after galloping at 8 per cent for 10 years.
Rama said the market sentiment improved in the past few weeks but challenges remained, highlighting the importance of prudent macroeconomic policies and continued reforms to set a strong foundation for accelerated growth.
He added that the current situation offered an opportunity to strengthen the business environment and enhance fiscal space.
Six consecutive quarters of sub-6 per cent growth has allowed for an opening of the output gap, which is likely to limit inflationary pressures even with the expected acceleration in economic activity, the Bank has said.
“WPI inflation is expected to average 5.3 per cent this year and decelerate further to 5.2 per cent in 2014-15 as pressure from food prices declines due to an improvement in agricultural output,” it said. Private economists and rating agencies have projected growth ranging between 3.7 and 4.8 per cent this year, and economic affairs secretary Arvind Mayaram has said that the analysts would raise their growth projections.