By Parush Arora
China doesn’t appear to be a threat to India anymore in the race to become the fastest growing economy in the world. In its biannual World Economic Outlook, published on 8th April 2017, the International Monetary Fund (IMF) forecasted India’s growth rate to be 7.2% in 2017 and 7.6% in 2018. On the other hand, China’s growth is expected to fall steadily to 6.6% in 2017 and 6.2% in 2018. IMF’s projection crowns India as the fastest growing economy and is expected to retain the tag for ensuing years.
Rise in potential growth rate
It was observed that post the Great Recession, India’s potential growth rate plunged to around 6.5%-7%. Following recent structural reforms by the Indian government, it is being argued that the potential growth rate is set to increase. With the GST bill to be rolled out this year, the growth forecast looks promising, taking into account the efficiency gains following its implementation.
Favourable international environment
Post the Great Recession and the Sovereign Debt Crisis, many developed nations opted for a protectionist stance so as to avoid harm due to future unforeseen shocks in the international market. This attitude has left foreign investors to look for alternative options to invest in. This has benefited India as investors seem to find investment in emerging economies to be safe and profitable.
Domestic factors play a big role
IMF has increased its forecast for India by 0.4% as against 6.8% in 2016. The demand shock of currency swap had convinced IMF in 2016 to decrease its forecast below 7%. Now that the repercussions have almost faded away, the domestic demand is expected to recover.
It is being perceived that the global growth rate will reach 3.8% by 2022 if the performance of India stays aligned with the expectations. However, the presence of non-performing assets (NPA) in the bank’s balance sheets could affect the formal credit system in relation to the flow of funds and investments. Policies to enhance the manufacturing sector must be introduced to improve the sector’s contribution to GDP. Though the IMF has set the trend for India’s future growth rate, it is up to the government to minimise the deviations around the mean.
Featured Image Source: Reuters
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