India's GDP may slow from 8.6% in 2015 to 7.0% in 2017 because of disruptions by demonetisation and the GST, the World Bank has forecast and warned that subdued private investment due to internal bottlenecks could put downside pressures on the country's potential growth.
The International Monetary Fund on Tuesday also lowered India's growth projection to 6.7% in 2017, 0.5% points less than its previous two forecasts and slower than China's 6.8%.
India's economic momentum has been affected by disruptions from the withdrawal of banknotes and uncertainties around the Goods and Services Tax (GST), the World Bank said in its South Asia Economic Focus, a biannual economic update.
As a result, growth is expected to slow from 8.6% in 2015 to 7.0% in 2017. Sound policies around balancing public spending with private investment could accelerate growth to 7.3% by 2018, it said.
While sustained growth is expected to translate to continued poverty reduction, more focus could be made to help benefit the informal economy more, said the report released here ahead of the annual meeting of the International Monetary Fund and the World Bank.
A slowdown in India's growth rate, the bank said, has also affected the growth rate of South Asia. As a result, South Asia has fallen to second place after East Asia and the Pacific.
"Real GDP growth slowed to 7.1% in 2016, from 8% in 15/16, and further to 5.7% in Q1 FY2017," it said.
On the one hand, public and private consumption gained pace: after implementation of the 7th central pay commission recommendations; and due to the revival in rural demand after normal monsoon and agricultural impetus. On the other hand, overall demand slowed as public investments started to wane.
According to the bank, the GST is expected to disrupt economic activity in early 2018, but the momentum may pick-up.
Evidence suggests that post-GST, manufacturing and services contracted sharply, it said.
The growth activity is expected to stabilise within a quarter – maintaining the annual GDP growth at 7.0% in 2018.
Growth is projected to increase gradually to 7.4% by 2020, underpinned by a recovery in private investments, which are expected to be crowded-in by the recent increase in public capex and an improvement in the investment climate (partly due to the passage of the GST and Bankruptcy Code, and measures to attract the FDI), the bank report said.
The most substantial medium-term risks are associated with private investment recovery, which continues to face several domestic impediments such as corporate debt overhang, regulatory and policy challenges, along with the risk of an imminent increase in US interest rates, it said.
"If the internal bottlenecks are not alleviated, subdued private investment would put downside pressures on India's potential growth," the report said. Downside risks to the global economy – and accordingly to export growth and capital flows – are also substantial given the possibility of monetary policy normalisation in the USA and risks of protectionism, it added.