This week the World Bank gave India a huge “tick” of approval – on Wednesday it said India’s GDP growth rate will return to 7.5% in two years’ time.
The bank was pleased that the Indian economy regained its momentum in the December quarter, recovering from disruptions caused by demonetisation and implementation of the goods and services tax (GST), to expand at 7.2%, the fastest in five quarters. The World Bank has projected economic growth to accelerate to 7.3% in 2018-19 and 7.5% in 2019-20.
Most of the critics of the Modi Government reform program claimed that demonetisation and the GST would hurt the economy – whereas they slowed the economy for a moment and then on it went, as the World Bank shows.
What few people agree on is just what size of fiscal dividend the government will get from the GST – but let’s just say the central government will be more cashed up than ever before.
“Maintaining the hard-won macroeconomic stability, a definite and durable solution to the banking sector issues, realization of the expected growth and fiscal dividend from the GST, and regaining the momentum on an unfinished structural reform agenda are key components of this. Accelerating the growth rate will also require continued integration into the global economy,” the bank said.
But the multilateral lending institution said decisive reforms will be needed to enable the Indian banking sector to help finance India’s growth aspirations.
Besides recapitalization, a consolidation of public sector banks, revising their incentive structure to align it more closely with their commercial performance, ensuring a level playing field for private banks, and opening the space for greater competition would be important measures to enhance the stability and efficiency of the banking sector, the bank added.
In addition, reforms to land, labour and financial markets would be needed to assure the continued competitive supply and use of key production inputs, the bank said.
A cashed up and confident central government can be expected to continue to drive reforms, so the outlook is good.
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