India's Strong Economy Continues to Lead Global Growth

IMF News, August 8, 2018

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India’s economy is picking up and growth prospects look bright, partly thanks to recent policies such as the nationwide goods and services tax.
India is one of the world’s fastest-growing economies, accounting for about 15 percent of global growth, and has helped lift millions out of poverty.
To sustain rapid growth and raise incomes for the country’s 1.3 billion people, India needs to build on reform successes, the IMF said in its annual assessment.

Expected economic growth: 7.3 percent for fiscal year 2018/19 (April 2018 through March 2019).
Growth in the prior year: 6.7 percent.
Inflation has edged higher, in part due to a reduction of economic slack.
Recent transitional shocks that weighed on performance include cash shortages after currency demonetization and costs from introducing the goods and services tax.

The goods and services tax created a unified national market for the first time by lowering internal barriers to trade, effectively establishing a free trade agreement for a market of over 1.3 billion people.
The GST is expected to:
- Increase economic activity in the formal sector, leading to better quality and more reliable jobs.
- Improve productivity and boost medium-term potential growth.
- Create fiscal room for increased social and infrastructure spending.

A new insolvency and bankruptcy code has been implemented to make it easier for creditors to seek repayment and is already shifting the power balance between debtors and creditors and improving corporate repayment discipline.
Central bank and government steps:
- Improve banks’ recognition of bad assets.
- Recapitalize public sector banks.
Expected outcome: stronger bank balance sheets and support for the flow of credit to the expanding economy.
Recommended additional reforms:
- Strengthen governance in public sector banks to complement financial-sector reforms.
- Improve incentives to enhance operational efficiency and foster more disciplined lending practices.
- Strengthen the quality and independence of banks’ boards.
- Consider privatization eventually.

India has eased access for foreign investors by allowing most foreign investments to enter sectors under the “automatic route,” reducing bureaucratic oversight.
To sustain FDI inflows and reduce remaining trade barriers, recommended actions include:
- Reducing trade documentation requirements and procedures.
- Lowering tariffs.
- Continuing to improve the business climate.
- Improving governance.

India has a young and growing population; about two-thirds of the total population is of working age (between 15 and 64).
Per capita income remains about $2,000 U.S. dollars, well below other large emerging economies.
Labor market rigidities:
- Numerous, outdated, and restrictive labor laws prevent firms from expanding to efficient scale, misallocate resources, and push activity into informal and unregulated sectors.
- These rigidities make it harder for women to join the workforce; female labor force participation in India is among the lowest in the region and has fallen recently.
Policy recommendation: Reform and streamline the complicated web of labor laws to promote employment in the formal economy and help sustain growth, complementing the effects of the GST.

Source: IMF News article “India's Strong Economy Continues to Lead Global Growth” (August 8, 2018).