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India is on path to emerge as the fastest growing economy on the World Bank growth chart of major economies for the first time. In its latest report, the Bank expects India to grow at 7.5 per cent in 2015, outpacing China, which is poised to grow at 7.1 per cent.
The collapse in commodity prices has been a boon for the country. Concerns over the current account deficit, fiscal deficit and inflation have all dissipated with the fall in oil prices. This, coupled with reforms have raised confidence in the economy adds the report.
On the whole, the Bank expects developing economies to grow at 4.4 per cent this year. Growth is likely to rise further to 5.2 per cent in 2016 and 5.4 per cent in 2017.
But the report warns of challenges ahead. With the US Federal Reserve expected to raise interest rates, borrowing costs are likely to rise in the coming months. “This could lead to market volatility and reduce capital flows to emerging markets by up to 1.8 per cent of GDP”, the report says. A slowdown in capital flows would in turn complicate policy.
Further, lower commodity prices are likely to impact commodity exporting emerging markets such as Brazil, weakening their growth prospects. "Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment," said World Bank Group President Jim Yong Kim.
Ayhan Kose, World Bank's Director of Development Prospects, added that "Unless emerging markets have taken the prudent policy steps to be fiscally and externally resilient, they may face significant challenges dealing with the turbulence and other fallout that could be associated with a Fed tightening."
In the developed economies though, the report points to growing momentum. Growth in the Euro Area and Japan has picked up and the United States continues to expand, despite a weak start to the year. The bank expects high-income countries to grow by 2 per cent this year, 2.4 per cent in 2016 and 2.2 per cent in 2017.
It predicts the global economy to expand by 2.8 per cent this year, 3.3 per cent in 2016 and 3.2 per cent in 2017.
