World Bank: India’s Growth Potential Remains High

October 18, 2013 Posted by India Briefing Reading Time: 2 minutes

Oct. 18 – Despite its recent economic concerns, India is expected to see gradual growth over the coming years, according to a report released this month by the World Bank.

In its semi-annual India Development Update, the World Bank said “the country’s growth potential remains high,” citing improved agricultural and export prospects, which are expected to exert a positive influence on the Indian economy by the second half of 2014.

According to the report, India’s economic under-performance has been largely due to broader global uncertainty based around the United States’ shifting monetary policy. These external shocks, combined with the rising costs of key commodities and a large current account deficit (CAD), has resulted in an outflow of weary investors.

Despite this, the World Bank sees a positive outlook for India going forward.

“The current situation is unlikely to place an insurmountable stress on the economy, but it does offer an opportunity for measures to strengthen the business environment, attract more FDI, and increase productivity,” said the report.

Several signs of strength have begun to emerge in the Indian economy, including a decrease in the CAD from 6.5 percent of GDP during the third quarter of the current fiscal year to just 3.6 percent in the fourth quarter. Core inflation has also abated, falling to 2.4 percent, a rate well within the Reserve Bank of India’s target range of 4 percent or lower.

The recent reduction of the CAD, which previously weighed heavily on the Indian economy, will also work to boost investor confidence and strengthen portfolio investments.

“International reserves could decline somewhat in 2013-14, but would still amount to a comfortable import cover of approximately five months,” stated the report.

The rupee’s historic depreciation was also examined in the report. According to the World Bank’s financial models, only two-thirds of the currency’s depreciation could be attributed to the underlying economic fundamentals of the Indian economy, with concerns over monetary tapering by the U.S. Federal Reserve accounting for a portion of the recent depreciation.

While the rupee’s decline has been met with broad concern domestically, the World Bank views the current situation as an economic opportunity to increase Indian exports, which have already helped to shrink the CAD.

In light of this, the report adds that “with the currencies of many other emerging economies weakening against the dollar, lasting improvements in export competitiveness will require policy efforts to fully take advantage of the emerging global opportunities.”

According to the report’s baseline scenario, India will begin to see an increase in economic activity starting in the second half of the 2014 fiscal year, resulting in an expected GDP growth of 4.7 percent. The full impact of this economic strength will be realized by the end of fiscal year 2015, with GDP growth expected to hit a high of 6.2 percent.

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