World Bank projects India's growth at over 6% in 2014-15

The World Bank has projected India's economy will grow over 6 per cent in 2014-15 and 7.1 per cent by 2016-17 as global demand recovers and domestic investment increases.

In China, growth is estimated to stay flat in 2014 at 7.7 per cent, slowing to 7.5 per cent for the next two years, reflecting deleveraging and less reliance on policy-induced investment.

Global gross domestic product growth may firm up to 3.2 per cent this year from 2.4 per cent in 2013, stabilising at 3.4 per cent and 3.5 per cent in 2015 and 2016, respectively, the World Bank said in its Global Economic Prospects report released on Wednesday.

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According to the report, the global economy is projected to strengthen this year, with growth picking up in developing countries and high-income economies appearing to be finally turning the corner five years after the global financial crisis.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank Group President Jim Yong Kim.

"The performance of advanced economies is gaining momentum and this should support stronger growth in developing countries in the months ahead.

“Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems and shore up social safety nets," he said.

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According to the report, in South Asia, weaker growth in India, following several years of rising inflation and current account deficits, has opened up a large negative output gap, which is projected to gradually close as the economy slowly recovers.

Better Indian performance will be heavily reflected in the region's growth, which is expected to strengthen to 5.7 per cent in 2014 and about 6.7 per cent in 2016, it said.

Growth in South Asia is estimated to have been a very weak 4.6 per cent in 2013, mainly reflecting weakness in India.

Growth appeared to be recovering toward the end of 2013, and regional GDP on a calendar-year basis is projected to slowly accelerate to about 6.7 per cent in 2016, mainly reflecting stronger growth in India and a cyclical recovery in investment and external demand, it said.

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"India's growth is projected to rise to just over 6 per cent in FY2014-15 and to increase to 6.6 per cent in FY2015-16 and 7.1 per cent in FY2016-17," the World Bank said.

"Growth in India will be led by recovery in global demand and an increase in domestic investment, subject to downside risks."

Pakistan's growth is expected to moderate slightly to 3.4 per cent in FY2013-14, reflecting necessary fiscal tightening, and then rise to 4.5 per cent in the medium term, it said.

Kaushik Basu, Chief Economist and senior vice president at the World Bank, said the global economic indicators show improvement.

But one does not have to be especially astute to see there are dangers that lurk beneath the surface, he said, adding that the euro area is out of recession but per capita incomes are still declining in several countries.

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"We expect developing country growth to rise above 5 per cent in 2014, with some countries doing considerably better, with Angola at 8 per cent, China 7.7 per cent and India at 6.2 per cent.

“But it is important to avoid policy stasis so that the green shoots don't turn into brown stubble," Basu said.

According to the report, growth in remittances to South Asia is estimated to have moderated to 6.8 per cent in 2013 from 9.7 per cent in the previous year.

"Flows to India dipped in the first quarter, but with the depreciation of the rupee, they rebounded to reach an estimated $71 billion in 2013," it said.

India, with large current account and fiscal deficits and weaker growth, was hit particularly hard by a withdrawal of portfolio capital (resulting in steep currency depreciation) in the middle of the year, stemming from apprehensions of tapering of US quantitative easing, the Bank said.

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"The rupee subsequently appreciated, in part because of policy interventions to support foreign exchange markets, and capital flows and equity markets rebounded as QE tapering was delayed to January," it said.

The Bank said weak gross domestic product growth has already taken a toll on corporate and bank balance sheets in India, as gross non-performing and restructured loans rose to 10.2 per cent of loans in September 2013, with India's central bank warning of stress on asset quality in the iron and steel and infrastructure sectors.

Further strains from a sharp withdrawal of foreign capital could increase risk of corporate debt distress, while one-off costs of bank recapitalisation can put pressure on fiscal positions, it said.