India returns to slower 7-8 percent growth trend : World Bank

India returns to slower 7-8 percent growth trend : World Bank

The slowdown is a result of uncertainties weighing down investment, tighter macroeconomic policies intended to fight still-high inflation, and the base effect of the strong agricultural rebound in 2010-11, the update released Wednesday said.

Slow growth in core OECD countries means domestic drivers for growth will have to be strengthened, it said. "This would include progress on important structural reforms, and further measures to achieve fiscal consolidation and reorient government spending toward investment and growth."

"Even then, risks from the uncertain international environment are high," the Bank said suggesting that "Policymakers would do well in reviewing crisis preparedness at this time."

GDP growth is estimated to have reached 8.5 percent in 2010-11, mainly because of strong agricultural sector performance with 6.6 percent growth. GDP growth slowed to 7.7 percent in the first quarter of 2011-12, and inflation remained high at around 9.5 percent, increasingly driven by core inflation.

In India, GDP growth in 2011-12 and 2012-13 is forecast to reach 7-8 percent, a slowdown from the trend before the global crisis. With the slow growth expected in core OECD countries, India's GDP growth will have to rely on domestic growth drivers, the Update said.

Major structural reforms aimed at improving the investment climate, in particular progress on current legislative initiatives (land acquisition, tax reform, financial sector reform, FDI in retail) would strengthen domestic growth drivers, the World Bank said.

The downside risks to growth are high because of the risks to global growth posed by the precarious situation in Europe, the Update said. A worst-case international scenario would lead to a collapse of demand for India's exports, and strong contraction in private sector spending, as was observed after the Lehman collapse in 2008 when the interbank market froze, and short term liquidity became very expensive, it said.

Accordingly "policymakers would do well to review their preparedness for another global shock and prepare contingency measures," the World Bank advised.

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