The World Bank has lowered India's GDP growth forecast for the current fiscal to 4.7% from its April projection of 6.1%. However, according to the latest India Development Update of the bank, the recent global market turmoil is unlikely to have major adverse effects on India and, instead, provides an opportunity to regain growth momentum through further progress on reforms.
On an optimistic note, Martin Rama, chief economist for the South Asia Region at the World Bank, said: "Although output growth in the first quarter of the current fiscal year fell to 4.4%, growth is expected to rebound strongly in the second half of FY14 with core inflation trending down, a bumper crop expected in agriculture (where a 5% increase in area sown is expected to raise agricultural growth to 3.4% from 1.9% a year ago), and exports likely to benefit substantially from the rupee's depreciation."
Growth is expected to improve further in the medium term as strengthening exports support a recovery in industrial activity and new investment projects come on stream, World Bank said.
Only last week, pointing to poor demand and weak manufacturing and services sector performance, the IMF slashed its projection of India's growth rate in market prices to 3.75% in 2013-14 from 5.7% estimated earlier. IMF said the growth would pick up to 5.1% next year.
India’s GDP growth slowed to a decade-low of 5% in 2012-13.
Fully tapping these opportunities, however, will require policy efforts to narrow the infrastructure gap, buttress the financial sector via capitalisation and broader banking, roll out financial sector reforms and ease the restrictive regulatory environment which creates strong incentives for Indian firms to remain small, and strengthen fiscal balances, the World Bank said.
The report's projections assume an improvement in the macroeconomic environment, with global growth accelerating to above 3% in 2014 from around 2% in calendar year 2013.
The bank also slashed its forecast for India's GDP growth in FY15 to 6.2% from the earlier 6.7%. "India's growth potential remains high but its macroeconomic vulnerabilities and high headline inflation, an elevated current account deficit, and rising pressure on fiscal balances from the depreciation of the rupee could impact the speed of economic recovery," said Denis Medvedev, senior country economist, World Bank, India.
While market sentiment improved in the last few weeks, the underlying challenges remain, underscoring the importance of prudent macroeconomic policies and continued progress on reforms to set strong