Global Economic Prospects

India is set to become the fastest-growing big economy in the world in the fourth year of Narendra Modi’s government, edging past China. It’s set to clock a 7% rise in GDP in 2017 compared with 6.9% for bigger rival China, the World Bank said in its flagship publication, Global Economic Prospects. India will recover to 6.4% in the current calendar year itself on the back of higher export growth and bolstered investor confidence with the election of a reform-minded government at the Centre.
Global growth is expected to rise moderately to 3.0% in 2015 from 2.6% in 2014 and further increase to 3.3% in 2017, the report said, pointing out that there will be significant divergence in trends and that the “oil price collapse will result in winners and losers”.
It warned that risks to the outlook “remain tilted to the downside” because of weak global trade, financial market volatility as interest rates in major economies rise, strain on oil producers and a risk of prolonged stagflation or deflation in the euro area or Japan.“In this uncertain economic environment, developing countries need to judiciously deploy their resources to support social programs with a laser-like focus on the poor and undertake structural reforms that invest in people,” World Bank president Jim Yong Kim said in a statement.
“In India, export growth has been robust, and investor confidence has been bolstered by the election of a reform-minded government. The current account deficit and elevated inflation—both persistent vulnerabilities—have declined considerably. Over the medium-term, growth is expected to rise steadily to 7% as reforms begin to yield productivity gains. This is expected to benefit other countries in the region which receive remittances from India,” the World Bank said in its report.
It will also benefit from softer crude oil.“Amongst large middle-income countries that will benefit from lower oil prices is India, where growth is expected to accelerate to 6.4% this year (from 5.6% in 2014), rising to 7% in 201617,” the statement said.
The new government has undertaken a raft of measures including liberalising foreign direct investment in defence and insurance and opening up railways, passed ordinances to auction coal blocks and ease land acquisition to boost business sentiment and pumpprime growth that witnessed decadal lows of sub 5% in the last two fiscal years.Growth in 2014-15 is expected to recover and climb to 5.5%, according to various forecasts.
The World Bank sees softening in oil prices as a window of opportunity for implementing subsidy and energy tax reforms in oil-importing countries such as India.
“This would make available additional fiscal resources fiscal resources which could be used to rebuild fiscal space or increase fiscal resources for better-targeted pro-poor spending or investment… The challenge now is for policy makers to seize this opportunity,” it said. India has deregulated diesel prices and is looking to further reform subsidies after the expenditure management commission submits its report this month.The report sees three challenges for developing countries--monetary, benign cyclical environment and need for structural reforms.
“Developing countries face three major policy challenges. First, monetary and exchange rate policies might have to adapt to the more normal (that is less easy) financial conditions that will eventually accompany the recovery in high-income countries. Second, some developing countries that face benign cyclical environments should rebuild fiscal space” said Kaushik Basu, World Bank chief economist and senior vice president.