India's economic growth set to gain pace despite US-China trade conflict

Reports by UN, OECD forecast slow growth worldwide as trade tensions, policy uncertainties rise

India’s economic growth is set to gain pace over the next two years despite rising trade conflict between the US and China spilling onto the global scene and policy uncertainties growing, global agencies have said.

Separate reports released by the United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) on Tuesday cited strong domestic demand and policy changes to keep India on the growth path.

“Despite downward revisions, growth in India remains strong amid robust domestic demand,” the UN’s World Economic Situation and Prospects (as of mid-2019) report said. 

India’s economic growth is expected to be at 7 per cent in 2019, down from 7.2 per cent in 2018, but will be held up by continuing levels of strong domestic consumption and investment that will support growth, the UN report said. Growth is expected to subsequently rise to 7.1 per cent in 2020.

On the other hand, the OECD has announced that improved financial conditions due to higher domestic demand and recent structural reforms will ensure India’s growth rate rises. Gross domestic product (GDP) growth in India is projected to strengthen to 7.25 per cent in 2018-19 (FY19) and close to 7.5 per cent in 2019-20, the Paris-based intergovernmental body said. Noting that headline inflation remains well below target and inflation expectations are adjusting down, the OECD expects New Delhi’s monetary policy to be loosened.

It further added that easier financial conditions due to fiscal or quasi-fiscal support have benefited the economy and along with new income support measures for farmers will help ease the road to growth.

Lower oil prices and the recent appreciation of the rupee will reduce pressures on inflation and the current account. India has reduced its key policy rates, similar to large developing economies such as Egypt and Nigeria, the OECD further added. India’s GDP growth had slowed to a disappointing 6.6 per cent in the October-December quarter of FY19.

Slipping global growth

According to the UN, growth in the world economy is expected to reduce from 3 per cent in 2018 to 2.7 per cent in 2019, and finally 2.9 per cent in 2020, reflecting a downward revision from the UN’s previous estimate. In tandem with slowing industrial production, international trade activity has visibly weakened, reflecting in part unresolved trade disputes between the US and China, the UN said.

Bilateral merchandise trade between the two-largest economies has subsequently declined by more than 15 per cent since September 2018.  However, India may be shielded from the ongoing trade war between economic behemoths. “India’s exports remain more robust, as around half of exports are destined for faster-growing Asian markets,” the UN report said.

This small reduction in the Indian economy is expected to drag down the overall fortunes of South Asia, as India generates two-thirds of the regional output, the report said. However, the subcontinent remains on a strong growth path, despite projections being moderated. 

Following an expansion of 5.7 per cent in 2018, GDP growth in the region is projected to drop to 5 per cent in 2019, recovering to 5.8 per cent in 2020. Across the developing world, gross fixed capital formation growth moderated in the second half of 2018, the report said.

Worryingly, the level of carbon dioxide in the atmosphere is projected to witness one of the largest-ever increases in 2019, the UN said. Carbon pricing initiatives remain limited and fragmented.