India recovery faster than projected: World Bank

India’s recovery after the slowdown is well underway and the prospects look bright on all macroeconomic fronts.

According to World Bank’s South Asia Economic Update, India’s economy will grow at 8-9 per cent over the next two years. Inflation, rising interest rates, small appreciation in the rupee and continued low growth in high-income countries, however, could weigh on the recovery. Risks to outlook come from volatility in capital inflows, staggering global recovery and inflation shocks. Staggered recovery in high-income developed nations might also adversely affect trade prospects and hit remittance inflows, however, growth prospects continue to be optimistic .

The report further states that the Indian economy is recovering faster than expected and is consistently getting broader based. “Growth in the second quarter of 2009-10 was an unexpectedly high 7.9 per cent …private demand growth has lately been the strongest in two years at the end of the third quarter of 2009-10,” says the report.

The growth in private demand has been seen as an “early sign” that a stronger platform for future growth is taking hold. Moreover, the report also notes that even as the third quarter growth was hit by a weak monsoon and waning fiscal stimulus, the industry continued to surge.

“Indicators suggest growing optimism on the economy and policy extending into 2010, as evident from improved ratings, confidence indexes, and expectations surveys,” the report adds.

It expresses concern over high inflation, especially that of food items, which “mars the bright picture”. But, the outlook continues to be positive. “Month-on-month, seasonally-adjusted annual rate indicates some moderation in inflation rates because of the drop in food prices in February 2010 compared to January 2010.”

The report further advocates a gradual exit from monetary exit policies, continued high expenditure in social sector programmes and following the fiscal consolidation plans as envisaged in Budget 2010-11.

The report notes that the recovery in the Indian financial markets is strong even though the credit growth remains low compared to previous years; it is picking up as indicated as a fast drop in excess liquidity in the banking system recently.