The World Bank said on Tuesday a "slow economic recovery" was on in India. It estimated growth at 6.4 per cent in 2015-16 and then to seven per cent in each of the next two financial years, compared to an estimated 5.6 per cent for the current year, 2014-15.
The projected economic expansion from consecutive years of sub-five per cent growth (2012-13 and 2013-14) would be slower if reforms are stalled and faster if the process is expedited, it has said in its first two chapters in 'Global Economic Prospects'.
It had already come out with growth estimates for FY14 and FY16. India's economy clocked 5.5 per cent growth in the first half of this financial year and the government is hopeful it would be a bit higher in the second half. It was a decadal low growth of 4.5 per cent in 2012-13 and a bit higher at 4.7 per cent in 2013-14. These were the first occasions in two decades that India's economy expanded below five per cent in successive years.
"A slow economic recovery is underway, helped by a sharp slide in inflation to multi-year lows and improving export momentum, in line with rising demand from the US, a major trading partner," the Bank said.
It recognised that falling inflation had left room for the central bank to loosen monetary policy but pointed towards not-so-low food inflation.
Weakening global oil prices, fading pass-through from currency depreciation in 2013 and the lagged effect of monetary tightening in 2013 made for lower headline inflation in South Asia, including India.
In India and Pakistan, part of the decline in inflation also stemmed from favourable base effects, which drove the moderation in food price pressures in the second half of the year, despite poor monsoons in both countries and drought in Sri Lanka.
"Nevertheless food inflation, which tends to have large second round effects on core inflation, remains elevated, particularly in India and Bangladesh," the Bank said, citing a study.
According to data issued on Monday, Consumer Price Index-based inflation in India rose to five per cent in December from 4.38 per cent in November, primarily due to a rise in food prices. In December, inflation for food items was 4.78 per cent, against 3.14 per cent in November. In December 2013, food inflation was 12.49 per cent.
On economic expansion, the Bank cautioned that weak bank balance sheets continued to impede financing for an upturn in the investment cycle.
"Stressed bank loans (including restructured loans) exceed 10 per cent of loans in Bangladesh, Bhutan, India, and Pakistan. Restructured and problem loans need to be recognised as non-performing, even though this would impair capital (with possible need for fiscal support)," it said.
"Such reforms are especially needed in India, where state-owned banks account for close to three-quarters of banking assets," it added.
Besides, power generation is unlikely to keep pace with growing demand in India, among other South Asian countries.
"In India, stagnating coal production has already resulted in repeated shortages in supplies to power plants. In both India and Pakistan, substantial transmission and distribution losses, insufficiently high user prices, and subsidies to special interest groups have resulted in repeated bailouts for the energy sector," it said.
In India, these represented a fiscal cost of 1 per cent of gross domestic product (GDP) in 2001, the Bank said.
A stagnant or declining share of manufacturing in Indian GDP is symptomatic of substantial supply-side bottlenecks and lagging reforms, said the Bank. "Onerous labour regulations, cumbersome bureaucracies, under-investment in human capital and large infrastructure deficits have undermined the region's competitiveness, making it hard for low-cost and labour-intensive manufacturing to thrive and to compete against the more flexible economies of East Asia."
Plus, cyclical weakness in recent years has meant industrial output expanded slowly in the post-crisis period, posing challenges of coping with a rapidly growing labour force. "As a consequence, manufacturing's share of economic output in India has stagnated over the past decade," says the report.
The Bank pointed to a narrow tax base in India as coming in the way of augmenting revenue. "Only three per cent of the population in India pays the personal income tax," it said.
It added that the proposed national goods and services tax was likely to boost revenue by reducing distortions and creating a single market for goods and services.