Demonetisation effect: World Bank says India's growth expected to decelerate to 7% in 2017

Demonetisation effect: World Bank says India's growth expected to decelerate to 7% in 2017 Washington: In an encouraging sign, the World Bank today projected a global growth of 2.7 per cent in 2017, even as it observed that stagnant global trade, subdued investment and heightened policy uncertainty marked another difficult year for the world economy. "After years of disappointing global

growth, we are encouraged to see stronger economic prospects on the horizon," World Bank President Jim Yong Kim said as the financial body in its latest report said that global economic growth is forecast to accelerate moderately to 2.7 per cent in 2017 after a post-crisis low of 2.3 per cent in 2016. "Now is the time to take advantage of this momentum and increase investments in infrastructure and people. This is vital to accelerating the sustainable and inclusive economic growth required to end extreme poverty," Jim said.

In the latest edition of the Global Economic Prospects, the World Bank said growth in advanced economies is expected to edge up to 1.8 percent in 2017. Fiscal stimulus in major economies, particularly in the US, could generate faster domestic and global growth than projected, although rising trade protection could have adverse effects, it said. Growth in emerging market and developing economies as a whole should pick up to 4.2 percent this year from 3.4 percent in the year just ended amid modestly rising commodity prices, the bank said.

However, the outlook is clouded by uncertainty about policy direction in major economies, the report said, adding that a protracted period of uncertainty could prolong the slow growth in investment that is holding back low, middle, and high income countries.

Analyzing the worrisome recent weakening of investment growth in emerging market and developing economies, it said that investment growth fell to 3.4 per cent in 2015 from 10 per cent on average in 2010, and likely declined another half percentage point last year. "We can help governments offer the private sector more opportunities to invest with confidence that the new capital it produces can plug into the infrastructure of global connectivity," said World Bank Chief Economist Paul Romer.

"Without new streets, the private sector has no incentive to invest in the physical capital of new buildings. Without new work space connected to new living space, the billions of people who want to join the modern economy will lose the chance to invest in the human capital that comes from learning on the job," he said.

Consumption was supported by lower energy costs, public sector salary and pension increases, and favourable monsoon rains, which boosted urban and rural incomes, it said adding that economic activity also benefited from a pickup in foreign direct investment (FDI) and an increase in public infrastructure spending.

"Unexpected demonetisation', the phasing out of large-denomination currency notes which were subsequently replaced with new onesweighed on growth in the third quarter of FY2017," the World Bank said. Weak industrial production and manufacturing and services purchasing managers indexes (PMI), further suggest a set back to activity in the fourth quarter of FY2017, it added. "For the whole of FY2017, growth is expected to decelerate to a still robust 7.0 per cent."

In its report, the Bank said there has been slowdown in investment in South Asia. "In India, gross fixed capital formation has been on a downward trend since 2011, with a shift in the composition from private to public," it said.

While public investment rose by 21 per cent in FY2016, private investment (which accounts for two-thirds of the total) contracted by 1.4 per cent, reducing overall investment growth to four per cent.

Infrastructure demand is expected to go up to US $1 trillion under the 12th Five-Year Plan (2012-2017). "Going forward, public and private investment should be supported by higher allocations in the FY2017 federal government budget to build and upgrade infrastructure, and the setup of a US $3 billion National Investment and Infrastructure Fund," it said.

According to the Bank, India's steep private investment slowdown has been attributed to several factors. The need to unwind excess capacity built during the pre-financial crisis growth boom amid weak external demand (eg in the manufacturing sector) has discouraged new projects and caused investors to shelve existing projects, it said.

"Second, policy uncertainty has been a factor," it said. For example, the stalled Land Acquisition Bill has extended project development timelines. Lack of federal and state government coordination, on compensation for land acquisition and environmental clearances, has contributed to cost and time overruns. Also lenders have been less willing to finance overleveraged corporates, especially in infrastructure related sectors (eg power and other utilities, steel, and cement firms).

In particular, the Reserve Bank of India's 2015 corporate governance reforms in state-owned banks (which represent two-thirds of the total banking sector lending) has adversely affected lending to leveraged corporates and conglomerates, the report said.