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G. Srinivasan

New Delhi, June 22 The World Bank says the reform agenda of the newly-elected Indian Government has already improved investor sentiment and could yield an even stronger recovery in investment.

In a Global Development Finance annual report, released on Monday, the Bank said stock markets in India advanced in April and May 2009, with a surge following recent elections that boosted market sentiment and underpinned expectations of an accelerated reform programme and greater openness to foreign investors.

Stating that in India, gross capital inflows were primarily composed of bank loans, there is a trickling of equity inflows for the first quarter of 2009. “Gross financial flows posted a recovery in India during April and May, as international investor confidence improved on early indications of a recovery for global growth on expectations that the country is well placed to benefit from an eventual turnaround”, it said.

The Bank projects India’s gross domestic product (GDP) growth at 5.1 per cent in 2009-10 and to eight per cent in 2010-11, against 6.1 per cent in 2008-09, 9 per cent in 2007-08 and 9.7 per cent in 2006-07.

The Bank reckons that the fiscal 2008-09 stimulus measures, geared at boosting demand, are equal to about 3.5 per cent of India’s GDP. As a result, the public sector deficit is projected to have increased from 5.8 per cent of GDP in 2007 to 9.8 per cent in 2008 and to over 12 per cent as of early 2009.

Referring to the larger South Asian region which saw the marked deterioration in investor confidence, collapse in capital flows and plummeting external demand and trade that translated into significant falloff in industrial production, the Bank said industrial production in India was down 2.4 per cent in March 2009 from a year earlier. It said industrial activity in India has been generally trending downward since late 2006, recording a halving of growth to 4.4 per cent in 2008, compared with outturns of 10 per cent growth in both 2006 and 2007.

On inflation it said, wholesale producer prices moderated sharply, reaching close to zero annual rate in March, although consumer price inflation has proven stickier downward at just below 10 per cent in March.

Stating that the regional fiscal balance is projected to deteriorate in 2009 to a deficit of 10.9 per cent of GDP from an estimated 8.9 per cent in 2008, it said interest payments represent over 20 per cent of total outlays for South Asia, by far the highest share among developing regions.

India, Pakistan and Sri Lanka are most vulnerable in this respect, with interest payments accounting for 20 per cent, 26.3 per cent and nearly 29 per cent of central government expenditures respectively.

While all export categories are facing downward pressures, it said India’s information technology (IT) industries are considered especially ‘vulnerable’ to the downturn in financial sector activity abroad.

Stating that against a trade-weighted basket of currencies in nominal terms the extent of depreciation of currencies in the South Asia region was more modest, it cited the case of the Indian rupee which depreciated by close to 20 per cent against the dollar from August 2008 to March 2009, but by only 6.6 per cent against the trade-weighted basket of currencies over the same span.

However, adjusting for inflation rates across trade partners, the pattern is more mixed it said adding that the real effective exchange rate (REER) for the Indian rupee depreciated close to nine per cent between August 2008 and March 2009.

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