Despite Current Downturn, Long-Term Growth Prospects for India are Bright, World Bank says

world bankNew Delhi, April 30, 2013 – India is regaining economic momentum and growth is expected to recover gradually to its high long-term potential, says the latest India Development Update of the World Bank.

According to the Update, a twice yearly report on the Indian economy and its prospects, economic growth is likely to accelerate to over 6.0% during the current financial year (April 2013-March 2014). Growth is expected to increase further to 6.7% in FY 2015. Recent data point to some improvements in economic activity: inflation and trade deficit came down in recent months, while private consumption and investment growth had accelerated in the third quarter of FY 2013.

“Despite the current downturn, long term prospects remain bright for India. India possesses the fundamentals to grow at sustained high rates over the next several decades,” said Martin Rama, World Bank’s Chief Economist for the South Asia region. “With the working age population increasing by 7 million people each year, the country will need to improve its business climate to attract the private sector investment needed for these new entrants to find productive jobs, thereby reducing poverty and boosting shared prosperity,” he added.

In the longer term, given India’s demographic transition, the country will still be a relatively young nation 20 years from now. This is likely to generate significant volumes of savings and investment over the coming years. The average schooling of the working age population will also increase by at least one full year and could well rise by as much as two years.

“While these effects will form the foundation for India’s strong growth in the decades to come, India’s growth drivers will increasingly have to come from domestic sources. To realize its long-term potential, India needs to continue making progress on its domestic reforms agenda, encourage investment and unlock supply constraints while adhering to fiscal consolidation,” said Denis Medvedev, Senior Country Economist, World Bank, India.

In recent months, both inflation as measured by the wholesale price index and the trade deficit have declined. Inflation fell below 6 percent and core inflation is now within the Reserve Bank of India’s (RBI) comfort range.

With the stabilization of the rupee and the expectations of a good monsoon, inflation is expected to decline further in the coming months, the Update says. The fiscal deficit too is likely to decline as the government has renewed its commitment to fiscal consolidation. According to the Update, a stronger fiscal stance and further improvements in economic activity could provide room for additional rate cuts.

The current account deficit reached a record high in FY 13, but is expected to narrow in the medium term. “The record widening of the current account deficit has been driven primarily by strong import flows– particularly fuel– and stagnant exports, both of which appear to be turning around,” Medvedev added.

The current update also specifically looks at India’s march towards universal health coverage and its fiscal implications.

Public spending on health is about 1% of GDP, significantly below other countries with similar levels of income – while out-of-pocket payments represent about 70% of health expenditures– one of the highest ratios in the world. India also lags in health impacts achieved from its spending. Large disparities in health outcomes are still evident across states and social groups.

The additional expenditure required to finance the costs of progressing towards universal health coverage could range from 0.4% to 1% of GDP by the end of the 12th Five-Year Plan. At current projections, securing the requisite financing for universal coverage would be less difficult for the central government, given the macroeconomic outlook presented in the Update, the existing high level of elasticity of central health spending relative to GDP, and credible policy commitment to increasing the outlays for health. However, this also requires aggregate state health outlays to increase by an estimated 20-25% per year.

“An increase in outlays of such a magnitude would require a major reprioritization of the health sector at the state level or substantial improvements in the efficiency of current health spending for many of the states,” said Somil Nagpal, Senior Health Specialist, World Bank, India.

This will also require that the recently introduced central and state initiatives aimed at universal health coverage are well-coordinated for their future expansion plans, creating a promising foundation for a reformed health finance and delivery system.