Forecast by IMF and World Bank
The IMF, followed the World Bank, in reducing the forecast for India’s economic growth in the current financial year. While the IMF cut its July projection for real GDP growth by a substantial 0.9 percentage point to 6.1%, the bank slashed the estimate by as much as 1.5 percentage points to 6%. These magnitudes of reduction underscore the severity of the ongoing slowdown.

Interestingly, by the bank’s own admission, its forecast is more optimistic than the average estimate of 32 Indian respondents who were polled as part of its South Asian Economic Policy Network Survey: these economists expect growth to be 5.7% this fiscal.

What is the cause of slowdown?
The only significant issue of debate is over the cause of the slowdown. Government has justified that the reduction in growth is cyclical in nature. However, some economists argue that structural factors are responsible for fall in growth.

The importance of an accurate diagnosis cannot be overemphasised since policy interventions to address the malady must be targeted appropriately to ensure enduring outcomes.

What are possible reasons?

  1. Crucially, the bank and the IMF have flagged that weak financial sector is one of the chief reasons for fall in economic growth. Country’s banks are facing severe burden of bad loans. Moreover, the World Bank warned that non-banking financial companies’ significant share in total credit and their linkages with banks “pose broad-based contagion risks”. Financial sector reforms, the bank suggests, would not only help resolve the sectoral infirmities but would also help put India back on a rapid growth path.
  1. The World Bank has also highlighted another key concern. Observing that a sharper-than-expected slowdown in major economies such as the U.S. and Eurozone could have severe spillover impacts, the bank noted that India is vulnerable to real GDP shocks in these advanced economies. In the case of a Chinese GDP shock, the onset of the impact on India would likely be delayed but substantially more pronounced.
  1. And while the IMF has urged structural reforms in labour and land laws to boost job and infrastructure creation, everyone agrees that fall in domestic consumption demand is the biggest drag on momentum. It may, therefore, make a lot of sense to heed Nobel laureate Abhijit Banerjee’s prescription and put more money in the hands of consumers, especially those in the rural hinterland, to reinvigorate demand.

Source: The Hindu

Relevant for: GS Prelims & Mains Paper III; Economics