The World Bank today marginally downgraded India's growth rate to 7.6 per cent in 2016 even as it said the country will continue to grow faster than its large emerging market peers.
The bank in its latest 'Global Economic Prospects' report downgraded its 2016 global growth forecast to 2.4 per cent from the 2.9 per cent pace projected in January.
India's growth too has been downgraded marginally by 0.2 per cent, while that of China remains the same and pegged the Communist nation at 6.7 per cent.
The bank also modified its projections for India's growth rate in 2017 and 2018 by a marginal down gradation of 0.2 per cent to 7.7 per cent growth in both the years.
"India will continue to grow faster than its large emerging market peers, with growth rates of 7.6-7.7 per cent from Fiscal Year 2016/17 to Fiscal Year 2018/19," it said.
The bank said half a point down grade in the global growth was due to sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade and diminishing capital flows.
"This sluggish growth underscores why it's critically important for countries to pursue policies that will boost economic growth and improve the lives of those living in extreme poverty," World Bank Group President Jim Yong Kim said in a statement.
"Economic growth remains the most important driver of poverty reduction, and that's why we're very concerned that growth is slowing sharply in commodity-exporting developing countries due to depressed commodity prices," Jim said.
The bank said that growth in India picked up to 7.6 per cent in Fiscal Year 2015/16, a 0.4 percentage point increase over Fiscal Year 2014/15, driven largely by domestic demand.
"Partly thanks to the ongoing liberalisation of India's foreign direct investment (FDI) regime, FDI to India surged 37 per cent from the launch of the 'Make in India' campaign in October 2014 to February 2016, with the computer software and automotive sectors attracting the bulk of this investment," the report said.
"Manufacturing activity, though dampened by weak external demand, accelerated 9.3 per cent in the final quarter of Fiscal Year 15/16. Relative to other large emerging economies, purchasing manager indices for India reflect more buoyant sentiment. Business start-ups are on the rise, particularly in the e-commerce and financial services sector," it said.
The ensuing job creation from strengthening economic activity and boost to real income from low inflation and increase in wages are lifting urban consumption.
Furthermore, increased public investment in power generation, roads, railways and urban infrastructure is contributing to an improved business environment and reduced supply-side constraints, the report said.
"Nonetheless, India faces notable headwinds," it said, adding that rural consumption has been hard-hit by two years of poor monsoons (rainfall in 2015/16 was 14 per cent below the historical average).
Despite five interest rate cuts since 2015, credit growth to the corporate sector remains sluggish because of stressed asset quality in the banking sector (especially for claims on the aviation, infrastructure, iron, and steel sectors), it said, adding that weak exports weigh on growth and February marked the 15th consecutive month of decline.
Rural incomes and spending should improve with the return to normal monsoons, as the benefits of direct transfers through the rolling out of the mobile banking initiative (Jan Dhan Aadhaar Mobile) are realised and improvements in agricultural productivity improve.
New sectors will continue to attract FDI. As of December 2015 some USD 45.7 billion (2.2 per cent of GDP) had been pledged under the 'Make in India' campaign. Private domestic investment is expected to benefit from an accommodative monetary policy, it said.
In addition, the government's planned investment in infrastructure, and the streamlining of business procedures and of the tax regime, are expected to alleviate some constraints, and crowd in private investment, it said.
Nonetheless, private investment will still be held back by infrastructure bottlenecks, a challenging regulatory environment, and by tight credit amidst the ongoing resolution of stressed assets in the banking sector.
If implemented as planned, continued fiscal consolidation from 2016 onwards should support investor confidence in India through future bouts of turmoil in global financial markets, the report said.
According to the bank, growth in South Asian region rose to 7.0 per cent in 2015, in line with previous projections.
Thus far in 2016, economic activity-led by India-has remained robust, supported mainly by domestic demand. Inflation remains benign, even if picking up in some countries, the report said.
Net exports continue to exert a drag on activity due to sluggish global growth; however, remittance inflows to the region have held steady, it said.
GDP growth is expected to be roughly stable at 7.1 per cent in 2016, and to pick up to 7.3 per cent by 2018, with strengthening global activity, it added.
