5 reasons why global institutions expect India to clock 7% plus growth rate

India’s economy is widely expected to clock above 7% growth rate, with both IMF and World Bank stressing that the country will surpass China’s GDP.

NEW DELHI: Lesser external vulnerabilities, plunging crude oil prices and above all Prime Minister Narendra Modi-led government’s reforms drive have led most global institutions such as IMF, Moody’s and World Bank to lift their economic growth outlook for the Indian economy.

India’s economy is widely expected to clock above 7% growth rate, with both IMF and World Bank stressing that the country will surpass China’s GDP rate very soon. “India’s economic growth clip this year and next will be better than previously assumed, overtaking China in 2015 to become the world’s fastest growing major economy and widening the gap further in 2016,” IMF and the World Bank have said in separate forecasts.

Why are global institutions bullish on the India growth story? We take a look at five key reasons that are making various agencies positive on the India growth story.

1) Domestic demand: Moody’s expects India’s economy to grow at 7.5% this year, helped by interest rate cuts that will buttress private sector spending. India’s economy is on a cyclical upswing and forward-looking indicators suggest domestic demand is gathering momentum, Moody’s Analytics has said.

“Low inflation has enabled the Reserve Bank of India to cut interest rates by 50 basis points (half a percentage point), easing pressure on the private sector. Lower rates as well as the government’s infrastructure and disinvestment programmes should provide a boost to domestic-oriented industries,” it said.

2) Reforms: Most global institutions have given thumbs up to Modi government’s reforms drive. “India’s growth is expected to strengthen from 7.2 per cent last year to 7.5 per cent this year and next. Growth will benefit from recent policy reforms, a consequent pickup in investment, and lower oil prices,” IMF’s World Economic Outlook said.

The strong growth in India has already made South Asia the fastest growing region in the world, World Bank noted.

India’s expected growth acceleration, World Bank noted in its twice-yearly South Asia Economic Focus report, is being “driven by business-oriented reforms and improved investor sentiment” and that growth could reach 8 per cent in fiscal year 2017-18 on the back of significant acceleration in investment growth.

“(India) is attempting to shift from consumption-to-investment-led growth at a time when China is undergoing the opposite transition,” it noted.

Moody’s feels that the government has taken encouraging steps to reduce regulations. “The government wants more foreign businesses to invest in India, with a focus on public and private partnerships, it said. “Foreign investment in India has been weak because of significant red tape and taxes. The government is taking encouraging steps to reduce these burdensome regulations to entice more foreign investment,” said Moody’s.

3) Lower crude oil prices: IMF is of the opinion that in many economies softer oil will help reduce inflation and lower external vulnerability and open room for structural reforms. IMF sees crude prices on average nearly 40 per cent lower on a year ago in 2015, rising 12 per cent in 2016. “Lower oil prices will raise real disposable incomes, particularly among poorer households, and help drive down inflation,” IMF said for India, as it called upon countries to press ahead with subsidy reforms.

“On the fiscal policy front, and following the lead of India, Indonesia, and Malaysia, countries should seize the opportunity provided by the current low fuel and food prices to further reform or phase out subsidies, which tend to be poorly targeted,” IMF said.
IMF says India’s inflation is expected to remain close to target in 2015. It sees consumer price inflation at 6 per cent in FY15, declining to 5.7 per cent in the following year.

World Bank said South Asia was the greatest global beneficiary of cheap oil as all countries were net importers.

“Together with favourable food prices, cheaper oil has contributed to a rapid deceleration of inflation. South Asia went from having the highest inflation rate among developing regions to having the lowest in barely one year,” World Bank has noted, while urging countries to take greater advantage of cheap oil to reform energy pricing.

4) Lower external vulnerabilities: IMF has forecast a stable current account deficit, pegged at 1.3 per cent in FY15 and 1.6 per cent in FY16. World Bank, on its part, pegged the current account deficit at well below 2 per cent in the medium term and noted that India “has a resilient external position” less than two years after the rupee depreciation episode.

Meanwhile, Crisil is of the opinion that India is better prepared to handle any shock from a US Federal Reserve hike. Crisil has said, “India’s strengthening economy now makes it better prepared to face the volatility in capital flows arising from interest rates hikes by the US Federal Reserve.”

5) Better among EMs: In the report titled India’s Economy Is On The Mend, But Corporations Remain Wary, Crisil said the growth prospects “appear brighter”, particularly among emerging markets.

The report noted that India is now the fastest growing economy among the BRICS nations (Brazil, Russia, India, China, and South Africa) and is no longer seen as part of the “fragile five” (Turkey, Indonesia, Brazil, and South Africa).

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