World Bank hopeful of India's growth recovery in FY21

India's sluggish growth momentum notwithstanding, the World Bank is sanguine about an economic acceleration next year once the corporate tax cut and income support scheme for rural poor start yielding results.

“India’s growth is expected to gradually recover to 6.9% in 2020-21 and 7.2% in 2021-22 as the cycle bottoms out, rural demand benefits from effects of income support schemes, investment responds to tax incentives and credit growth resumes. However, exports growth is expected to remain modest, as trade wars and slow global growth depresses external demand,” the World Bank said in its South Asian Economic Focus.

It said India’s recently launched stimulus package will support the ongoing expansionary monetary policy. While monetary policy will continue to act as the main counter-cyclical tool, the fiscal measure is expected to have a positive economic impact.

The report released on Sunday ahead of IMF-World Bank annual meetings in Washington between October 18-20, however, said India’s economic growth momentum in the current fiscal has slowed due to sluggishness in domestic demand and a subdued credit growth to its industries.

The World Bank pared India's growth forecast for the current year sharply to 6% from the earlier 7.5% in line with the Reserve Bank of India (RBI) and other global agencies, but said India was in the midst of a cyclical slowdown and not structural as many other experts have forecast.

“Country’s cyclical slowdown is broad-based and severe,” the report said.

Earlier this month, the RBI too cut India’s growth forecast to 6.1% from an earlier 6.9% but expressed the hope that growth will recover to 7% in 2020-21.

“The stimulus package came as a surprise and will amount to 0.7% of the GDP. It includes the rollback of some previous corporate tax increases and some additional tax cuts. As part of the package, more mergers of publicly-owned banks are planned and around $32 billion will be available for bank recapitalisation.

“In addition to giving the RBI regulatory authority over the housing financial sector and NBFCs, the government is planning to give partial credit guarantees to public sector banks… All these measures will help to contain the downturn,” the World Bank said.

It, however, raised concerns about the availability of fiscal space for all these measures and cautioned the government against higher-than-expected public borrowings, which could put upward pressure on interest rates and potentially crowd out the private sector.