By
Gyan Pathak
The
Indian economy is forecast to grow by 7.3 per cent in the medium term during
2019-23, says the OECD Economic Outlook for Southeast Asia, China and India
2019. Labour market conditions point to solid growth in private consumption,
although rising inflation and interest rates can be drags. The push for
consolidation will most likely limit the government’s spending flexibility as
well. How infrastructure projects are carried out will be the key. Maintaining
banking sector health is another challenge.
The
biannual publication prepared by the Asia Desk of OECD Development Centre in
co-operation with Economic Research Institute for ASEAN and East Asia (ERIA)
and the United Nations Economic and Social Commission for Asia and Pacific
(UNESCAP) noted that India’s economy expanded 8.2 per cent in first quarter of
the financial year ending March 2019. Economic growth forecasts point to a
slower growth of 7.5 per cent in 2018, and 7.3 per cent in 2019. The positive
near term factors include sturdy bank credit growth in 2Q 2018 and the recovery
in the year-on-year growth in tourist arrivals to 4.1 per cent in 2Q 2018 from
1.6 per cent in the 1Q indicating the strengthening of private spending. It is
unlikely that government price stability mechanisms will be scaled back until
the end of the fiscal year.
Private
spending accounted for more than half of the growth of 1Q 2019 as headline
inflation receded despite weakness in the local currency and rising oil prices.
However, in comparison to the 4Q 2017, fixed investment growth slowed down from
14.4 per cent to 10 per cent in 1Q 2018. Growth in public spending by contrast
decreased from 16.9 per cent to 7.6 per cent. The public spending was obviously
in line with the government’s intention of trimming the deficit for the fiscal
year.
Factors
such as the continuous climb in global oil prices, weak currency and rising
interest rate do not bode well for consumption. Consumers remained generally
pessimistic. Fixed investment prospects too are dimmer. Apprehensions were compounded
by the decline in the growth of infrastructure industries index. Hikes in
central bank policy rates supporting uptick short and long term bond yields
also present challenges to resolution of bad debts.
However,
the projected growth will depend much on Infrastructure projects which are more
than 1,300 in number. The projects were originally valued at around Rs 16 lakh
crore or $216 billion. These projects would be key to India’s medium term
economic performance during 2019-23. The manner in which the projects will be
delivered is equally crucial to the mitigation of credit and fiscal risks.
Incidentally,
a government assessment noted that delays had already affected 263 projects in
May 2018 due to issues related to land acquisition, forest clearance, supply of
equipment, fund constraints and geological surprises, for example (MOSPI,
2018). Another 348 projects had logged cost overruns, which carry excess cost
amounting to over Rs 3 lakh crore or $41 billion. These cost overruns are
equivalent to more than 19 per cent of the initial total cost.
Investment
in areas outside infrastructure will just be as crucial and it is encouraging
that FDI inflows have continued to rise. Since 2017, India has gradually opened
up further sectors to foreign participation. These include retail, private
security, construction, air transport and pharmaceutical sectors. Private
consumption will likely remain buoyant during the period given the positive
labour market situation, as long as the inflation and interest rates do not
pick up steeply in the coming months.
The
report recommends that India’ medium-term plan should be transforming the
country into a prosperous, highly educated, healthy, secure, corruption-free,
energy-abundant, environmentally clean and globally influential nation by
2031-32.
The
recent developments in the policy areas in India mainly include education,
manufacturing, health, infrastructure and FDI. The National Policy on Education
under development was to be implemented by the end of 2018. A new defence
production policy under development targets Rs 1.7 trillion turnover in
military goods and services by 2025 with exports from the sector totaling Rs
350 billion. The procurement process is also to be simplified under the plan.
The
report mainly enlisted the FDI as the major structural policy challenge in the
country. It says that continuing FDI reforms and develop opportunities for
technology transfer will remain the key issue. It is more so because as a
percentage of GDP, inflows of FDI into India declined from a recent peak of 3.8
per cent in 2008 to 2 per cent in 2016. This rate was lower than in most other
Emerging Asian Countries. FDI has still an important role to play in India’s
growth and development
The
report mentions that reforms to FDI regulation are being made under the Make in
India initiative, liberalizing inflows in a number of sectors. Along with this
initiative, efforts are being made to improve the business environment
generally. However, more can be done to realize the full potential of foreign
investment, particularly in fostering technology transfers and productivity
growth. Policy options include training and education, protecting intellectual
property rights, promoting FDI in technology-intensive sectors, enhancing
performance requirements linked to the transfer of technology, offering
investment incentives, and retooling policies restricting FDI. At the same
time, it is important that FDI supports inclusive growth by generating
employment through balanced geographical distribution. (IPA Service)
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