In its latest report on India, the International Monetray Fund(IMF),published on Tuesday,not only reaffirms that the country is "again one of the world's fastest-growing economies" – accounting for about 15 percent of global growth – but also that India it could be what China previously was for the world economy.
It was in 1991, when India waved goodbye to the Licence Raj and embraced economic liberalisation, that it was first likened to the elephant – slow, ponderous but powerful and impossible to ignore. Now, 27 years later, the International Monetary Fund (IMF) believes the $2.6 trillion economy is an elephant that is starting to run.
Describing the near-term macroeconomic outlook for India is "broadly favourable," the report said, India is projected to clock an economic growth of 7.5 per cent in the 2019-2020 fiscal year on strengthening of investment and robust private consumption, the IMF said in its latest report.
Growth is forecast to rise to 7.3 per cent in fiscal year 2018/19 and 7.5 per cent in 2019/20 on strengthening investment and robust private consumption, the report said.
"The prolonged slowdown in global growth, subdued investments and stressed balance sheets of the banking and corporate sectors have impacted India's efforts to achieve its growth potential. Despite these challenges, growth has accelerated," read a statement by Subir Gokarn, India's Executive Director to the IMF, and Himanshu Joshi, his Senior Advisor.
"India has three decades before it hits the point where the working age population starts to decline. So that's a long time. This is India's window of opportunity in Asia… Only a few other Asian countries have this," Salgado told PTI. "For the [next] three decades, it [India] is a source of growth for the global economy and could be even longer. But three decades where India can be almost what China was for the world economy for a while."
All in all, Salgado believes that things are relatively positive for us. "India has a young population. It has the potential for a demographic dividend of the next three decades," he said, but quickly cautioned that the benefits of demographic dividend are not automatically realised.
"It takes good policies to create jobs, to create even stronger economic growth. Seven to eight per cent growth is very good. It's one of the best in the world. But for India, which is appropriately aspiring to quickly catch up with the richer advanced countries, you need even stronger growth," he explained, adding that India ought to aspire to double-digit growth like China used to post. "Because if that doesn't occur, there is the risk that India could grow old before it becomes rich," he warned.
Headline inflation is projected to rise to 5.2 per cent in fiscal year 2018/19, as demand conditions tighten, along with the recent depreciation of the rupee and higher oil prices, housing rent allowances and agricultural minimum support prices, it said.
The report's favourable medium-term outlook reflects continued robustness in private consumption and a recovery in investment, which is supplemented by progress in bank balance-sheet repair and improved credit growth. Better still, it sees economic risks to the outlook as "tilted to the downside" – be it external risks such as higher global oil prices or domestic financial vulnerabilities.
According to Ranil Salgado, IMF's mission chief for India, the organisation views India as a "long run source of global growth". After all, it is a key driver of global economic growth, next only to China and the US.
The current account deficit is projected to widen further to 2.6 per cent of the GDP on rising oil prices and strong demand for imports, offset by a slight increase in remittances, the report said.
It said that financial sector reforms have been undertaken to address the twin balance sheet problems, as well as to revive bank credit and enhance the efficiency of credit provision by accelerating the cleanup of bank and corporate balance sheets.
"Stability-oriented macro-economic policies and progress on structural reforms continue to bear fruit" in the country, the report said.
It said following disruptions related to the November 2016 currency exchange initiative and the July 2017 Goods and Services Tax (GST) rollout, growth slowed to 6.7 per cent in fiscal year 2017/18, but a recovery is underway led by an investment pickup.
The report recommended that continued fiscal consolidation is needed to lower elevated public debt levels, supported by simplifying and streamlining the GST structure.
Further, while important steps have been taken to improve the recognition of Non-Performing Assets (NPAs) and recapitalise Public Sector Banks (PSBs), more needs to be done.
"A recent large fraud at a PSB highlights financial sector weaknesses and underscores the need for the government to take further steps to improve the PSBs' governance and operations, including by considering more aggressive disinvestment," it said.
With demand recovering and rising oil prices, medium-term headline inflation has risen to 4.9 per cent in May 2018, above the mid-point of the Reserve Bank of India (RBI)'s headline inflation target band of about four per cent.
However persistently-high household inflation expectations and large general government fiscal deficits and debt remain key macroeconomic challenges.
"Systemic macro-financial risks persist, as the weak credit cycle could impair growth and the sovereign-bank nexus has created vulnerabilities," the report said.
Economic risks are tilted to the downside, the report said, adding that on the external side, risks include a further increase in international oil prices, tighter global financial conditions, a retreat from cross-border integration including spillover risks from a global trade conflict, and rising regional geopolitical tensions.
"Domestic risks pertain to tax revenue shortfalls related to continued GST implementation issues and delays in addressing the twin balance sheet problems and other structural reforms," it said.