India needs to boost reforms push to raise potential growth: World Bank

The World Bank on Monday said India’s potential growth could benefit from accelerated implementation of an already ambitious reform agenda, amid an expected slump in global potential growth to a three-decade low by 2030.

The report, titled “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies,” offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the Covid-19 pandemic and the Russian invasion of Ukraine. These rates can be thought of as the global economy’s ‘speed limit’, it said.

The analysis shows that global potential GDP growth can be boosted by as much as 0.7 percentage points — to an annual average rate of 2.9 per cent — if countries adopt sustainable, growth-oriented policies that would convert an expected slowdown into an acceleration of global potential GDP growth.

“A lost decade could be in the making for the global economy,” said Indermit Gill, the World Bank’s chief economist and senior vice-president for Development Economics. “The ongoing decline in potential growth has serious implications for the world’s ability to tackle the expanding array of challenges unique to our times—stubborn poverty, diverging incomes, and climate change. But this decline is reversible. The global economy’s speed limit can be raised—through policies that incentivise work, increase productivity, and accelerate investment.”

The report said addressing the aftermath of financial sector distress in India could unlock significant growth. “India has a less developed financial system than many of its peers, with a heavy state presence. To improve the sector’s efficiency and depth, reforms could be undertaken to further rationalise the role of public sector banks, ensure a level playing field in the banking sector, and promote the development of capital markets,” it said.

On India’s infrastructure deficit, the World Bank said reforms suggested by the Task Force on the National Infrastructure Pipeline should be implemented, including improving project preparation processes, enhancing the capacity and participation of the private sector, improving contract enforcement and dispute resolution, and improving sources of financing.

The World Bank said in the case of India, estimates of potential growth since 2010 have been in the range of 6-8 per cent a year amid slowing investment growth from an annual average of 10.5 per cent in 2000-10 to 5.7 per cent in 2011-21.

“In FY14, private investment, which accounted for nine-tenths of total investment, stagnated as global financial conditions tightened rapidly and capital outflows accelerated. Subsequent years saw continued muted investment growth relative to the preceding decade,” the report said.

The Bank said several factors contributed to India’s slowdown in investment growth, including heightened regulatory and policy uncertainties, delayed project approvals and implementation, continued bottlenecks in the energy sector, and reform setbacks.

“Large corporate debt overhangs and non-performing assets in the banking sector have weighed on credit and investment growth across the region. In India, the burden of regulatory compliance, delays in utility connections, difficulties in obtaining permits to start and operate a business, high taxes, and rigid labor markets raise the cost of doing business and discourage investment,” it added.

The report highlighted India’s recent shift in focus of government spending toward infrastructure investment, consolidating labour regulations, privatising underperforming state-owned assets, and modernising and integrating the logistics sector.