World Bank slashes forecast to 4.7%

Also pegs CAD at 4.1% of GDP for this financial year

The World Bank has joined the various non-government agencies that believe India’s gross domestic product (GDP) expansion would be below five per cent this year. The finance ministry still says it belives otherwise.

The Bank also pegged the current account deficit (CAD) at 4.1 per cent of GDP in 2013-14, significantly higher than the 3.7 per cent hoped by the ministry. The Bank believes the Reserve Bank (RBI) should probably look at core or manufactured product inflation, rather than food inflation, to decide on its monetary stance later this month. If heeded, this could result in a reversal of the central bank’s hawkish policy.  

In its Índia Development Update, 2013, issued on Wednesday, the Bank scaled down India's GDP  growth estimate to 4.7 per cent from its earlier projection of 5.7 per cent for 2013-14. It attributed the new projections to macro-economic vulnerability, particularly high inflation, the CAD and fiscal imbalance.

If the economy grows by 4.7 per cent, it would be the lowest since 2002-03. After falling to a decadal low of five per cent in 2012-13,  growth fell to a four-year low  of 4.4 per cent in the first quarter of 2013-14. "The pace of economic activity in FY14 will be hampered by a weak out-turn during the first quarter," said the Bank.

Recovery hasn’t been visible for the second quarter, too. Industrial growth was only 2.7 per cent in the first month of the second quarter and 0.6 per cent in the second. "Consecutive months (July-August) of negative business sentiment and higher interest rates will limit the potential for recovery in the second quarter. The weak momentum from the first quarter will be carried over to the second quarter," said the report. However, like the government, it showed optimism on growth picking up from the second half of this year, also carrying over to the next financial year. "The expected bumper crop could give a boost to agriculture. 

Along with that, good exports could result in the revival," said the agency. Merchandise  exports rose by double digits in each of the three months of the second quarter.  Another multilateral agency, the International Montery Fund (IMF), had projected GDP to grow 4.25 per cent in FY14, which drew flak from all quarters of the government.

However, the finance ministry at that time was quick to say that the growth projection is usually near to what the World Bank forecasts and not the IMF.

 

To a query why has the World Bank come out with a comparatively optimistic growth forecast, main  author of the report--Denis Medvedev-- said,"The projections by various agencies cannot be compared as the methodology varies. However, the forecast by various agencies have less difference."

 

The Prime Minister's Economic Advisory Council (PMAEC) had cut India's growth forecast to 5.3% from its earlier projection of 6.4% for the current financial year. The finance ministry too expects the economy to grow above the 5%, or close to 5.5%.

 

The World  Bank stressed upon the fact that India should take advantage of the downturn in the global market. "India should enhance its competitiveness, like raising its export potential because of the depreciating rupee", said Martin Rama, Chief Economist, South Asia of the World Bank.

 

The multi-lateral agency was appreciative of the recent policy reforms taken by the government to fix the situation. It was also optimistic of an expected pickup in investment in the months ahead. The World Bank said that though investment rate is still high and projected it at 29.6% of the GDP for the current financial year. To deliver high economic growth from these investments, the structural problems need to be addressed.

 

The Wholesale Price Index-based inflation was projected at 5.3% for FY14. The PMAEC has projected this in the range of 5-5.5%. 

 

On the external front, the World Bank said that the current account deficit (CAD) will be 4.1% of the GDP. However, the government has been constantly maintaining that CAD will be restricted to 3.7% of the GDP this year. Most analysts agreed with the government, with some predicting even less CAD.

 

On whether inflation should be an hinderance for a rate cut by the Reserve Bank of India in its quarterly policy review due by the month end, the agency said, "It depends on what indicator of the inflation you take. In this case, the core inflation should probably be looked at which is quite low and not the food and fuel inflation which are quite high", said the World Bank in the press briefing.

 

The wholesale-price inflation rose to 6.46%  in September against 6.10%  as food inflation exerted pressure by continuing to remain over 18%. However, manufactured product inflation remained low even as it rose to more than two% from  almost 1.9%  in August.

 

It said if the sentiments are restored, India has a high potential of growing at 7-8% in the long run.