By Devika Panse
The recently released United Nations (UN) World Economic Situation and Prospects 2018 report put forward some interesting insights especially with regards to India. According to the report, India’s economy is likely to expand by 7.2 percent in 2018 and go up further by 7.4 percent in the following year.
Overall, the economic outlook for South Asia is seen mostly favourable and steady for the short term, notwithstanding significant medium-term challenges, said the report, unveiled by United Nations Department of Economic and Social Affairs (UN-DESA). Such a steady outlook is expected to be driven by robust private consumption and sound macroeconomic policies.
Monetary and fiscal policy
“Monetary policy stances are moderately accommodative while fiscal policies in several economies maintain a strong emphasis on infrastructural investment. The recovery of external demand is also buttressing growth,” said the report.
It also added that the outlook for India remains largely positive, “underpinned by robust private consumption and public investment as well as ongoing structural reforms. Hence, GDP growth is projected to accelerate from 6.7 percent in 2017 to 7.2 percent in 2018 and 7.4 percent in 2019.”
The anaemic performance of private investment remains a key macroeconomic concern for India with the gross fixed capital formation, as a share of GDP, falling to 30 percent in 2017, from 40 percent in 2010. The lack of investment growth, despite the easing of monetary policy, is being seen as a major hurdle.
The economy is currently facing low credit growth, low capacity utilisation, especially in the industrial sectors. On the other hand, corporates are facing balance sheet problems. “In this environment, vigorous public investment in infrastructure has been critical in propping up overall investment growth,” the report points out.
Potential reform measures
As reported by Business Standard, “Credit growth is subdued despite monetary easing, but bank recapitalisation and the Indian Bankruptcy Code (IBC) have the potential to revive credit growth”, said N R Bhanumurthy, Professor, National Institute of Public Finance and Policy. “Strengthening its fiscal accounts, especially through the widening of the tax base, and addressing infrastructure deficit are two major concerns for the Indian government”, he added.
Achieving the Fiscal Responsibility and Budget Management (FRBM) target could be a significant challenge in the context of the Goods and Services Tax (GST) as well as recent stimulus measures.
“Achieving the 3.2 percent fiscal deficit may not be an issue, but the quality of expenditure is more important than meeting the fiscal deficit target,” Bhanumurthy told reporters while presenting the report.
Impetus to take the right steps
The report said that the favourable prospects for inflation, coupled with mostly sustainable current account deficits, will facilitate macroeconomic policy management across the region in the near term.
While we may see lower inflation rates and a stabilised economy in the upcoming years, there is some pressure on the Government to make the right moves; with effective implementation of the Indian Bankruptcy Code (IBC) and other market stabilising initiatives.
Featured Image Source: Pixabay
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