India’s Economic Outlook: Opportunities and Challenges
Ranil Salgado, IMF Mission Chief for India and Andreas Bauer, Senior Resident Representative for India, Nepal and Bhutan, delivered a talk on “India’s Economic Outlook: Opportunities and Challenges” at World Trade Centre on February 27th, 2019. The talk presented a background of the global economic scenario with a particular emphasis on India’s growth prospects.
Globally, growth is slowing down at a faster than expected pace. Particularly, this slowdown is mainly witnessed in Europe. In anticipation of potential tariffs, in 2018, there has been a large plunge in trade as well. Asia remains a source of growth by contributing to 1/3rd of global GDP. Also, Asia contributes to 63% of global growth, largely driven by India and China. In particular, India has received an upgrade for 2019’s growth due to falling oil prices.
Asia: Asia remains particularly vulnerable to a sudden tightening of financial conditions due to its high private sector leverage problem. Especially, China is dealing with twin problems of high leverage and shadow banking which could lead to weakened productivity and growth. Moreover, the highest impact of the trade war will be on US and China. Although, India stands to benefit from trade diversion. But the confidence effect for India will be negative as well.
India: India is recovering from two shocks: demonetization and GST. For India, real indicators have been positive and high frequency indicators are a mixed bag. The PMI Index has been usually strong for manufacturing and services. GDP growth is forecasted to be 7.32% for the year. Inflation also remains contained, in particular, a deflation has been noted in food prices. Also, the output gap is closing. On the other hand, FDI inflows have been slowing down and FPI flows have turned negative. The next decade could witness a boost in real GDP due to the positive impact of GST.
Domestic and External risks faced by India:
|Fiscal Consolidation has been delayed
||Volatile oil prices
|Financial sector challenges
||Tightening of global financial environment
|Slowdown in reform pace – could weigh on investor sentiment
||Retreat from cross border integration
On the upside, India has substantial reserves. Moreover, India does not have major concerns as private sector leverage is quite low.
India’s macroeconomic policy frameworks have improved and gradual reforms have been witnessed since the 1990s.
Some of the reforms are:
- Insolvency and Bankruptcy Code
- Gradual Capital A/c liberalization
- Improvement in ease of doing business
Also, India has 2.5 – 3 decades to reap the benefits of its demographic dividend. Although, there is a danger of becoming old before being able to become rich as India is aging rapidly as well. Currently, India is also grappling with structural problems like lack of agricultural productivity and fewer creation of jobs.