India’s real GDP growth forecast for 2018-19 remains at 7.3 per cent while the growth is relatively higher at 7.5 per cent for 2019-20, as per the latest IMF report titled “World Economy Outlook”. The economic growth rate of India in the IMF Report is explained to be higher than that of China. As per the IMF report, China’s growth rate in both the years was at only 6.2%.
The lower prices of oil have helped India to grow faster. Yet another reason for faster growth cited by the IMF report is low pace of monetary tightening. However, the lack of enough job creation is seen as one of the challenges of Indian economy. There is also a debate for introducing universal basic income (UBI) in India, ensuring a threshold cash transfer to the households. Some Indian states are seriously contemplating to roll out the UBI. This transit to universal basic income is seen as a powerful policy alternative to the welfare schemes designed by the Government of India. However, there are challenges to this transition due to inadequate progress in financial inclusion and digital infrastructure in public finance.
The IMF Report released in this month emphasizes that India will remain the fastest growing emerging economy in the world. Economists have denied the adverse impacts of global headwinds on Indian economy. The major anticipated headwinds are increasing trade tensions between US and China; and the volatility in oil prices. IMF has revised downwards the global growth projections taking into considerations of these headwinds. It is only 0.2 percentage points for 2019 and 0.1 for 2020. These adverse headwinds can arise primarily from commodity markets and financial markets.
The pressure from US economy on India is yet another concern in terms of capital flows – which depends on interest rate differentials-and trade. High tariffs by US can adversely affect the trade in emerging economies. However, IMF report noted that US has reached a high in the business cycle, when world economic prospects are meagre. The IMF report also noted that job creation in the US is very high. Consumer confidence is too at record high. The downward risks for the US will be in the trade and financial sectors.
The quality of fiscal consolidation is yet another concern in sustaining the pace of economic growth. The recent Comptroller and Auditor General (CAG) reports have highlighted that the quality of fiscal consolidation has been a matter of concern and can have adverse impacts for long term macro-economic stability and economic growth. Yet another debate is with respect to the new tax reforms relating to the rates of GST. The multiplicity of taxes is seen as one of the challenges of GST implementation. However, the fundamental reforms like the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC) should help India in maintaining the growth momentum in the long term.
Agrarian crisis is a challenge to sustained economic growth in India. The widening inequality needs to be stemmed to maintain the quality of economic growth. However, the farm loan waiver policy alone cannot tackle the agrarian distress in India as only a few Indian farmers have access to formal banking credit markets. The declining rate of gross capital formation, especially in agricultural sector, is a matter of concern in maintaining the high pace of economic growth in India. The fiscal-monetary policy co-ordination is also a significant ingredient to sustain India’s growth story. The Indian Union Budget for 2019-‘20 is expected to address the farmer’s loans and related issues.
Another report published by the multinational professional agency Pricewarerhouse-Coopers’ (PwC) on the same day as IMF published its report; noted that “India and France are likely to surpass the UK in the world’s largest economy rankings in 2019, knocking it from fifth to seventh place in the global table.”
India’s economic fundamentals are strong and the economy is poised to meet the global challenges head on with resilience and foresight.
Script: Dr. Lekha Chakraborty
Associate Professor, NIPFP & Visiting Professor: American University, Washington DC