Headwinds for growth

Deeper reforms needed to put India on a high-growth path

The International Monetary Fund (IMF) has revised downwards its estimates of growth in India’s gross domestic product (GDP) by 20 basis points for both 2019-20 and 2020-21. The IMF now sees GDP growth coming in at 7.3 per cent in the ongoing fiscal year and at 7.5 per cent in the year to come. The IMF is the third multilateral agency to revise growth forecasts downwards in recent days. Last week, the World Bank and the Asian Development Bank both set a lower forecast for India’s GDP growth in 2019-20. They, as well as the Reserve Bank of India (RBI), estimated it would be 7.2 per cent, also 20 basis points lower than their earlier forecast. The Central Statistics Office of the government estimated in February that growth in 2018-19 would be 7 per cent — down from the 7.2 per cent it had released earlier. There has thus been some downgrading of India’s growth momentum all round. 

It is worth noting that the multilateral agencies’ expectations of a moderate pickup in GDP growth over the next two years — from about 7 to about 7.4 or 7.5 per cent — are dependent upon looser fiscal and monetary policy and some revival in demand, and not upon a resurgence in private investment. This reflects the RBI’s recent relaxation of monetary policy and its two successive cuts in the headline interest rate. But there is limited fiscal headroom for the RBI to stimulate growth, given that government borrowing has not been reduced sufficiently. The IMF argues, in its outlook for the Indian economy, that the build-up of debt will have to be reduced. This is correct, since it is serving as a drag on private sector borrowing and investment. India will also face global headwinds, as the agencies have cut their estimates for global growth for 2019 by 20 basis points to 3.3 per cent — the lowest since the financial crisis in 2008 —blaming trade tensions between the US and China, loss of momentum in Europe and uncertainty surrounding Brexit. Of course, the future path of crude oil prices will also play a major role. 

It is clear that for sustainable growth going forward, business-as-usual from the next government will not be enough. At best, India will, if the current slow momentum of reform is maintained, stabilise growth at around 7.5 per cent  according to the new series of GDP. This is clearly not enough. The need is to raise India’s potential GDP growth considerably. This can only happen if deeper structural reforms are carried out as a priority. Unfortunately, few of these appear to be on the agenda of either national political party at the moment. Labour and land law need to be re-examined to see where the bottlenecks are for private investment at the moment. It is also clear that state-driven growth — through spending on infrastructure, for example — has lost its ability to drive India’s growth over 8 per cent a year. Nor has this spending been able to “crowd in” private investment to the degree earlier thought. It is essential to ensure that the government now borrows less so that private investment, which is more productive and growth-enhancing, can take up some of the slack and restore growth to a higher trajectory.