Stating that India’s growth is “resilient”, the International Monetary Fund (IMF) on Tuesday retained its forecast of 7.6 per cent growth in 2016-17 and 2017-18 for the country.

“India’s Gross Domestic Product (GDP) will continue to expand at the fastest pace among major economies, with growth forecast at 7.6 per cent in 2016–17,” the IMF said in its World Economic Outlook.

This projection is in line with that of the Reserve Bank of India. The government is also hopeful of close to 8 per cent growth this fiscal year, even though the economy expanded by 7.1 per cent in the first quarter.

The IMF said the economic recovery will continue to benefit from the improvement in trade, more effective policy actions and stronger external buffers. “These have helped boost sentiment,” it said.

Upbeat on GST The IMF further noted that the Goods and Services Tax will be positive for trade and investment. “This tax reform and the elimination of poorly targeted subsidies are needed to widen the revenue base and expand the fiscal envelope to support investment in infrastructure, education and healthcare,” it said. However, it called for more policy actions, including measures to increase efficiency in the mining sector, increase electricity generation and ease rigid labour market conditions.

“Continued efforts by the RBI to strengthen bank balance sheets through full recognition of losses and increasing bank capital buffers remain critical for improving the quality of domestic financial intermediation,” it said.

The report also noted that while inflation has declined more than expected, underlying inflationary pressures continue due to the bottlenecks in food storage and distribution.

More reforms needed It called for further structural reforms in the sector to ensure that consumer price inflation remains within the target band over the medium term. The report has projected consumer price index based inflation at 5.5 per cent in the current fiscal year and 5.2 per cent in 2017-18.

The IMF also maintained its global growth projection of 3.1 per cent for 2016, which is slightly weaker than the projection in its April report. For 2017, it has pegged the global growth rate at 3.4 per cent with a gradual increase to 3.8 per cent. “The recovery is expected to gather some pace in 2017 and beyond, driven primarily by emerging market and developing economies, as conditions in stressed economies gradually normalise,” it said.

Growth in South Asia

According to the report, South Asia remains a global growth hotspot and has proven resilient to external headwinds such as China’s slowdown, uncertainty around stimulus policy in advanced economies, and slowing remittances.

The main challenges remain domestic, and include policy uncertainty as well as fiscal and financial vulnerabilities.

In Pakistan, economic activity is projected to gradually accelerate over the medium term reaching 5.0 per cent in 2017 and 5.4 per cent in 2018, building upon 4.7 per cent GDP growth at factor cost in 2016 (5.7 per cent at market prices).

Growth in Bangladesh has remained robust despite internal and external headwinds, it said. Growth will be sustained at 6.8 per cent in 2017, coming slightly down from 7.1 per cent in 2016, the report added.

On India, the report said economic growth remained robust, which, as in the past, is expected to support continued poverty reduction. “This year is expected to see some convergence in rural and urban economies, supported by stimulating policies, such as passage of GST and civil pay revisions, along with good monsoons,” the report said.

Re-balancing of growth drivers will in turn support the sustainability and inclusiveness of GDP and household income growth going forward, it said. “Optimism on the growth front needs to be balanced with caution when translating to broad-based poverty reduction.

Despite the recent success in poverty reduction, gains have been uneven, with greater progress in states and social groups that were already better-off,” the report said.

“India faces the challenge of further accelerating the responsiveness of poverty reduction to growth, enforcing inclusion of presently excluded groups (such as women and scheduled tribes), and extending gains to a broader range of human development outcomes related to health, nutrition, education and gender, where the country continues to rank poorly,” said the report.

Downside risks

The report also listed out “significant downside” risks in the near term.

“First, continued uncertainties in the global environment, volatility in commodity prices, broader spillovers from Brexit on world trade, and a further slowdown of the Chinese economy, could further delay a recovery of external demand,” it cautioned.

Second, it said, the government has set ambitious targets for raising revenue from divestments and spectrum auctions. If these are not met, there is a risk that growth-enhancing capital and social spending may be cut to meet fiscal targets, or that fiscal targets may be missed, undermining the credibility of fiscal policy, it warned.

The expected boost to rural consumption from favourable monsoons could be dampened by deleveraging of debt incurred by farmers over the previous two drought years.

Private investment also faces several domestic impediments in the form of corporate debt overhang, stress in the financial sector, and regulatory and policy challenges. “If these bottlenecks are not alleviated, subdued private investment would create downside pressures on India’s potential growth,” the report said.

The World Bank said economic growth remains robust. GDP growth accelerated to 7.5 per cent y/y in the four quarters ending June 2016 from average of 6.5 percent in the previous twelve quarters, it said.

This acceleration has been led by urban consumption and public infrastructure investments, it said, adding that rural consumption has been constrained by two successive drought-years and subdued growth in rural wages.

Sustained growth in manufacturing and modern services, as well as growth in personal credit have underpinned urban consumption. Investment momentum remained subdued despite concerted growth in public spending, largely due to global excess capacity and deleveraging of corporate and bank balance sheets, the report said.