Chart buster

With both the World Bank and the IMF upping their GDP growth forecasts for the current fiscal to 7.5 per cent, India is all set to emerge as the world’s leading economy in terms of growth. According to the bank’s mid-year outlook for the year, the global economy is expected to grow by 2.8 per cent in 2015, which is slightly less than what it had predicted at the start of the year. While China, which is undergoing a managed slowdown as it tries to shift from export-driven to domestic consumption-led growth, slips to second place with a forecast growth of 7.1 per cent this year, reading anything beyond this — other than the statistical difference — would be unwise. The two economies are vastly different in scale. Nevertheless, it is an encouraging indicator that the long, post-crisis slowdown has ended for India. However, the World Bank itself has flagged potential headwinds which can put the sustainability of the new, higher growth trajectory at risk. First is that growth in both the key global economies of the US and China is slowing. In fact, the growth outlook for the US is sharply down from the 3.2 per cent predicted in January, to 2.7 per cent. Further, the sharp fall in oil prices, which helped free up fiscal space and narrow the deficit, is over, and energy prices are rising once again. This means policymakers will need to tackle the downside of fuel price deregulation sooner rather than later. With India’s exports still dominated by commodities, most of which are witnessing a secular downtrend in prices, this is bound to increase the pressure on the trade balance and, as a result, the rupee. The risk of the US Federal Reserve turning off its supply of cheap money, and consequent capital outflows from Indian markets, is also quite real.

This is perhaps why investor response to the new numbers has been muted. The BSE Sensex plunged 470 points on Thursday — the day the World Bank released its forecast — as investors were spooked by a delayed and deficient monsoon and a surge in crude prices. Corporate results, too, have been lukewarm. Together, they point to the biggest area of concern: the quality of growth. Manufacturing growth is lacklustre, agriculture is staring at a drought and the mining sector is hit by internal bottlenecks and external price pressures. This casts a question mark over the economy’s ability to sustain higher growth and generate the kind of jobs needed to sustain domestic demand.

The Centre needs to urgently focus on measures to ameliorate agrarian distress in the wake of a poor monsoon, and work on pump priming the economy by jumpstarting its own spending on infrastructure creation. Reviving investments also depends on how India Inc and the banking sector address the current issue of stressed assets. Getting key reforms, particularly the stalled land acquisition Bill, is also of paramount importance. So while the new GDP forecast puts India at the head of the global growth table, staying there is going to take some doing.

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