Oct 30, 2015

7TCPC - Fiscal consolidation will be tough: World Bank

New Delhi: Alikely rise in oil prices, a drop in corporate tax rates and the burden of the Seventh Pay Commission (which will increase salaries of government employees) will make it tough for the government to stick to its fiscal consolidation roadmap starting 2016-17, the World Bank said on Thursday, even as the government gets down to prepare its next budget, which will be presented in February 2016.

“Oil prices are unlikely to decline further, with the World Bank among other observers projecting a modest increase. Corporate tax rates will be reduced over four years beginning FY 16-17, from the existing 30% to 25%, posing downward pressure on direct taxes if not accommodate the implementation of recommendations from the 7th Pay Commission, which is expected to submit its report in January 2016,” the World Bank said in its bi-annual India Development Update.

The centre has said it will bring down fiscal deficit to 3.9% of gross domestic product (GDP) in 2015-16, and further to 3.5% and 3% in the next two years.

The World Bank, however, kept its growth projection for India unchanged at 7.5% for 2016-17, saying that the higher capital expenditure in last six months will even out the effect of increased global uncertainty.

The Bank said that while in the near term, India is well-positioned to weather the global volatility due to low trade exposure to China, fairly closed local bond markets and sufficient forex reserves (worth nine months of imports), in the medium term, the Indian economy will not be immune to a slowdown in global demand and heightened volatility. It projected the economy to grow at 7.8% and 7.9% in 2017-18 and 2018-19, respectively, as investment rebounds.

“India’s ambitious program of structural reforms and infrastructure investments is proceeding, albeit at a slower pace than envisaged... 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 long period will require a recovery of export growth,” it added.

Merchandise exports contracted in September for the 10th straight month as shipments of petroleum products continued to decline on lower crude oil prices and external demand remained weak amid a tepid global economic recovery.

The World Bank projected the current account deficit will rise to 1.7% of GDP and 2% of GDP in 2016-17 and 2017-18, respectively, from an estimated 1.4% of GDP this fiscal year, as import growth overshoots export performance.

India Ratings on Thursday cut its 2015-16 growth projection for India to 7.5% from 7.7% due to expected lower agricultural growth caused by deficient rainfall. “Although investment is showing the signs of incipient recovery, Ind-Ra believes a full blown investment recovery will take anywhere between 12 to 18 months. The likelihood of the consumption demand growing at 8.2% has brightened in FY16 (FY15: 6.3%; FY14: 6.2%) on a significant moderation in inflation and inflationary expectations,” it added.

The Bank said a faster economic recovery hinges on the implementation of key reforms such as enacting the goods and services tax, boosting the balance sheets of public sector banks, rebooting the public-private partnership model, improving the ease of doing business, and amending land acquisition and labour regulations.

External risks to the economy may resurface in the event a tightening of US monetary policy disrupts capital flows to emerging markets, as was the case during the “taper tantrum” of mid-2013, affecting financing conditions and delaying investments, the Bank said. “Finally, extreme weather is predicted to continue globally, with a severe El Niño forecast for the remainder of 2015 and posing upside risks for food prices,” it added.

SOURCE - livemint. com