India's economic growth will regain strength and approach 7.50% by 2020, according to the OECD's latest Economic Outlook. The new income scheme for small farmers will support rural consumption. Investment growth will accelerate as capacity utilisation rises, interest rates decline, and geopolitical tensions and political uncertainty are assumed to wane. Lower oil prices and the recent appreciation of the rupee will reduce pressures on inflation and the current account.
Monetary policy could be loosened somewhat as headline inflation remains well below target and inflation expectations are adjusting down. Rising public sector borrowing requirements reflect the implementation of new welfare schemes, sluggish tax revenue, and growing financial needs of public enterprises and banks. Reducing the high public debt-to-GDP ratio would require improving the collection of the Goods and Services Tax and broadening the personal income tax base. Ensuring a swift resolution of bankruptcy processes would help contain non-performing loans and boost productivity by promoting the reallocation of resources to more productive firms and sectors.
India has the fastest growth among G20 economies. Export growth has held up well, with export orders growing steadily. The Goods and Services Tax (GST) administration has continued to improve, enabling exporters to get faster tax refunds, and ongoing efforts to improve trade infrastructure, logistics and processes are starting to pay off.
Investment has continued to grow robustly, supported by hefty public sector projects. In contrast, private investment, in particular in manufacturing, has been affected by uncertainty ahead of the parliamentary elections, combined with persistent difficulties in financing projects, acquiring land and getting all the necessary clearances. Rural consumption, two-wheeler and tractor sales have slowed, driven by subdued agricultural prices and wages.
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