An Indian worker monitors a metal structure at a plant in Kheda region, near Ahmedabad, Gujarat state. Photo: AFP

The noise around India’s slowing economy just got a whole lot louder with the World Bank confirming what many have said before. The global body stated that the current slowdown is “severe.” It has drastically cut its growth forecast for the current fiscal year to 6% from 7.5%. In April, when it predicted 7.5% it had said that India’s economic outlook was strong.

India’s former central bank governor, the noted economist Raghuram Rajan, had a similar diagnosis, arguing that things are not going to get better any time soon under the Narendra Modi regime.

In its latest South Asia Economic Focus report released on Sunday, the World Bank said that the country is currently growing at its slowest pace in six years, expanding by just 5% in the April-June quarter, hit by flagging consumer demand and a slackening in government spending.

India’s industrial output also shrank at its fastest rate in more than six years in August, data released last week showed, indicating that a slew of government measures had yet to underpin a recovery.

Manufacturing growth plummeted to below 1% in the second quarter of 2019 (June-August) compared with over 10% growth a year earlier. Private consumption also slipped to 3.1% in the last quarter from 7.3% a year before.

“India’s cyclical slowdown is severe,” the report said. The weakness is mostly due to a deceleration in local demand, according to the bank. “In such a weak economic environment, structural issues surface and the weak financial sector is becoming a drag on growth.”

The World Bank report expressed concern over a long period of weak growth as it fears it will hamper the government’s fiscal consolidation plans. India recently cut corporate tax rates to spur growth, which will cost about 1.5 trillion rupees in tax revenues.

“While the authorities have shown steadfast commitment to fiscal prudence, the significant growth deceleration as well as the corporate tax cuts undertaken to counter it come with heightened risks of fiscal slippage,” the bank’s report said.

In an effort to kick-start the economy, India’s central bank has cut interest rates five times this year and the policy rates have been brought down by 135 basis points to 5.15%, the lowest in nine years.

Reserve Bank of India has also made it mandatory for banks to link their retail loans to external interest rate benchmarks in order to make its interest rate decisions effective and benefit the borrowers. It took this step as in the past banks were reluctant to pass on the rate cuts to its customers in full.

Despite the current downturn, the World Bank sees growth potential in  India. “It’s still a fast-growing economy. So even with the recent slowdown, it has growth numbers that are higher than in most countries of the world. It’s still a fast-growing economy with a lot of potential,” World Bank’s Chief Economist for South Asia Hans Timmer told Press Trust of India.

The World Bank expects India’s growth to gradually recover to 6.9% in 2020-21 and to 7.2% in the following year.

Rating agencies bearish

Last week Moody’s Investor Services slashed India’s growth forecast to 5.8% from 6.2% earlier. It likewise expected the Indian government to slip in maintaining its fiscal deficit target of 3.7% of the gross domestic product by 0.4 percentage points.

Earlier the Reserve Bank of India had slashed the county’s economic growth projection by 80 basis points to 6.1% for 2019-20. Rating agency Standard Poor’s has also pared down its India growth forecast to 6.3% from 7.1% earlier.

Former central bank governor Raghuram Rajan  pointed out that India’s fiscal deficit conceals a lot and could push the economy into a “worrisome situation.” He was delivering the OP Jindal Memorial lecture at Brown University in the United States.

“India is losing its economic way in part because it is centralizing power without persuasive economic vision. We risk wasting the demographic dividend,” he said. “This government is extremely centralized, which puts a lot of pressure on the leadership. There is a lot of uncertainty about the overall economic vision at the top. Today what we have is a Prime Minister’s Office which essentially works through the bureaucracy. The ministerial level is often bypassed. Ministers are disempowered for the most part,” he said.

According to Rajan, the finance and real estate sectors are symptoms of the slowdown. India has been unable to figure out new sources that will trigger growth. The former central bank governor drew attention to the decline in investments, exports and consumption in an economic decline that he sees as being now structural rather than cyclical.

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