While growth will very likely remain above 7 percent in the next fiscal year, uncertainty about its momentum is high and downside risks ample. According to the Update, in the near term India is relatively well-positioned to weather the global volatility. Its low trade exposure to China and considerable foreign exchange reserves provide ample buffer.
In the medium term, however, the Indian economy is not immune to a slowdown in global demand and heightened volatility. India requires some measure of foreign capital inflows to finance both fiscal and current account deficits and ultimately the investments to spur growth. China's slowdown has further deteriorated India's already weak export outlook. Although India may be able to achieve fast GDP growth without export growth for a short period, sustaining high rates of GDP growth over a longer period will require a recovery of export growth, the Update says.
"There are good reasons for confidence in India's near-term prospects. To lay the foundation for sustainable growth and accelerate job creation, implementing the government's reform program is key. While progress is visible in several areas, including improvements in the ease of doing business, some key reforms, most notably the implementation of the Goods and Services Tax (GST) can be a potential game changer for India," said Onno Ruhl, World Bank Country Director in India.
For the economy to achieve its potential, the Update calls for three key domestic reforms. First, boosting the balance sheets of the banking sector by addressing the underlying challenges in the infrastructure sector, especially power and roads. The poor and deteriorating asset-quality of public sector banks is the biggest challenge facing the financial sector and a drag on credit growth, the Update says. Second, continuing to improve the ease of doing business and enacting the GST; and third, enhancing the capacity of states and local governments to deliver public service as more resources are devolved from the center.
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