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The Finance Ministry might not agree with the World Bank's projections of 4.7% economic growth for the current financial year, but even this growth faces downside risks if the government does not continue with its reform agenda, corporate and banks' vulnerabilities increase or external environment deteriorates.
Yesterday, the Bank had scaled down its projections for India's economic growth rate from the 5.7% estimated earlier for 2013-14.
Even the truncated growth projection now is based on the assumption that the economy would witness a revival from the second half of the current financial year.
"The baseline scenario of acceleration in growth in the second half of 2013-14 and further improvements thereafter builds in the assumptions of continued progress on the policy reform agenda as well as a benign global environment," the Bank said in its India Development Update issued yesterday.
On domestic front, the multi-lateral agency said the government has set up the Cabinet Committee on Investments (CCI) in December 2012, and more recently a special project-monitoring group, which removed last-mile hurdles to 28 large infrastructure projects, was constituted. These steps need to be followed up with additional actions and close monitoring of delays in project preparation to ensrue that the rebound in investment envisioned in the forecast materialises, the Bank said.
The Bank lauded new RBI governor Raghuram Rajan for initiating a set of banking sector reforms, which are likely to improve flexibility in the banking system and facilitate financial inclusion and penetration through expansion of point-of-sale terminals and mini-ATM usage.
"However, growing vulnerabilities in the corporate and banking sector must be watched closely as the baseline scenario assumes no further substantial deterioration in asset quality," the Bank said.
Gross NPAs of commercial banks recorded an average increase of 24.7% during the last six years and reached $30 billion in 2012-13. Public sector banks, which account for 73% of banking assets, share a disproportionate burden of this increase.
While restructured advances, some of which are expected to translate into NPAs, stood at 6% of standard advances for all commercial banks, the figure was around 9% for nationalized banks at end-March, 2013.
NPAs saw a decline in Q4 of FY13, due to improved recovery, lower slippages and higher write-offs. However, this improvement was short-lived, as gross NPAs and restructured assets of scheduled commercial banks rose again, reaching around 10% in June, 2013. The deterioration was due mainly to slippages with the public sector banks.
Latest estimates indicate that gross non-performing loans are expected to increase from 3.4% in March, 2013 to possibly 4.4% by March, 2014.
If the economy grows by 4.7%, it would be the lowest since 2002-03. After falling to a decade low of 5% in 2012-13, growth fell to a four-year low of 4.4% 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% in the first month of the second quarter and 0.6% 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.
