Four reforms, including the passage of the GST Bill, can help the economy to rebound, it says

NEW DELHI: The World Bank has lowered its growth forecast for India to 7 per cent from 7.6 per cent in 2016-17, citing a slowdown in consumption and manufacturing due to demonetisation and an ongoing decline in private investment and credit constraints due to impaired bank balance sheets.

The World Bank’s Global Economic Prospects January 2017 report added that the Indian economy is subsequently set to recover its growth momentum, with growth rising to 7.6 per cent in FY18 and further strengthening to 7.8 per cent in FY20.

“Unexpected ‘demonetization’— the phasing out of large-denomination currency notes which were subsequently replaced with new ones—weighed on growth in the third quarter of FY2017,” the report added. “Weak industrial production and manufacturing and services purchasing managers’ indexes (PMI), further suggest a set back to activity in the fourth quarter of FY2017.”

This was further accentuated by other economic factors, the report added, leading to a slump in the entire year’s growth rate.

“A retrenchment of private investment, reflecting excess capacity, corporate deleveraging, and credit constraints due to impaired commercial banks’ balance sheets, also had an adverse effect on activity,” according to the report. “For the whole of FY2017, growth is expected to decelerate to a still robust 7.0 per cent.”

The report, however, noted that four key reforms in India in 2016 could help growth rebound.

These, it said, were the passage of the bankruptcy and insolvency code, the liberalisation of FDI norms across sectors, the passage of the Goods and Services Tax (GST) Amendment Bill, and the agreement between the government and the Reserve Bank of India on a monetary policy framework that includes setting up a monetary policy committee and agreeing on a flexible inflation target.

“Various reform initiatives are expected to unlock domestic supply bottlenecks and raise productivity,” according to the report. “Infrastructure spending should improve the business climate and attract investment in the near-term. The ‘Make in India’ campaign may support India’s manufacturing sector, backed by domestic demand and further regulatory reforms.”

“Moderate inflation and a civil service pay hike should support real incomes and consumption, assisted by bumper harvests after favorable monsoon rains. A benefit of ‘demonetization’ in the medium term may be liquidity expansion in the banking system, helping to lower lending rates and lift economic activity.”

Demonetisation could still cause major problems in the short term, slowing reforms and affecting smaller economies dependant on the Indian economy, according to the World Bank.

“In the short-term, ‘demonetization’ could continue to disrupt business and household economic activities, weighing on growth,” according to the report. “Further, the challenges encountered in phasing out large currency notes and replacing them with new ones may pose risks to the pace of other economic reforms (e.g., Goods and Services Tax, labor, and land reforms).”

The report added that the demonetisation effect on trade and remittance channels could also affect growth rates in smaller economies such as Nepal and Bhutan.