OECD trims India’s growth outlook for 2017 and 2018

Temporary effect of demonetisation and GST

Business & Politics

September 26, 2017

/ By / Kolkata

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India's Secretary Economic Affairs Shaktikanta Das and OECD Secretary-General Angel Gurría in a Press Conference in New Delhi in March 2017

India’s ex-secretary economic affairs Shaktikanta Das and OECD secretary-general Angel Gurría in a press conference in New Delhi in March 2017

The Organisation for Economic Co-operation and Development (OECD) makes a downward revision of India’s growth projection for 2017 attributing it to the transitory effects of demonetisation and the implementation of the Goods and Services Tax (GST).

In its June 2017 report, OECD pointed out a positive outlook for India stating that the economic growth in India will remain the fastest-growing in the G20 economy. However, the latest projection by the Paris-based association states that India’s economic growth will likely reach 6.7 pc in place of 7.3 pc predicted in June.

The downward revision by OECD comes as a result of the recent economic reforms implemented in India. The calling off of the old high currency notes in November 2016 and the recent imposition of the GST are cited as the major reasons.

The report also indicates that the fiscal growth of India in 2018 will reach 7.2 pc leaving behind the revised growth of China (6.6 pc) in 2018. However, for the present financial year, China’s growth prospects have received an upward revision to 6.8 pc keeping the country atop in the list.

Future growth promises in India

Although the last quarter growth in India witnessed a downward revision, OECD points out that in the longer run, the GST is expected to boost investment, productivity and growth. In an interview with MIG TV in March 2017, OECD secretary-general, Angel Gurría said, “India is taking bold economic reforms and it is giving confidence about the future. So, the Indian as well as the foreign investors are getting interested and wants to participate in the future growth of the economy.”

When asked about whether India was in an ideal position to implement reforms such as demonetisation and GST, Gurría said, “No, I don’t agree that the conditions have to be ideal before you start the reforms. I think you have to start the reforms the moment you have the political possibility of doing that which means when the government is strong, it has a strong leadership and it has the votes to carry through.”

India's growth outlook in 2017 and 2018 trimmed

India’s growth outlook in 2017 and 2018 trimmed

The interim economic outlook projection’s downward revision for India is not just for 2017 but also for 2018. In June 2017, the OECD predicted that India’s GDP growth in 2018 will by 7.7 pc, which is now projected as 7.2 pc. Although it is believed that India will overtake China in terms of growth in 2018, the downward assessment is observed as a critical appreciation of India’s recent fiscal reforms.

Focus on sustainable and inclusive medium-term growth

In its latest Interim Economic Outlook, OECD summarises the world economy by stating, “The world economy has picked up momentum, as expanding investment, employment and trade support synchronised growth across most countries.”

While 2017 has depicted a suitable global expansion (3.5 pc) over 2016 and the upcoming year also gearing up for a further growth of 3.7 pc, OECD, in this report pointed out how strong, sustainable and inclusive medium-term growth is yet to be secured.

“The short-term outlook is more broad-based and the upturn is promising, but there is no room for complacency,” said OECD chief economist Catherine L Mann. “Monetary policy should remain accommodative in some economies but with an eye on financial stability so as to remain supportive of further rebalancing towards fiscal and structural initiatives. Structural efforts need to be intensified to bolster the nascent investment recovery, to address slow productivity growth and to ensure the recovery yields benefits for all.”

Europe’s upward revision; worst for the UK

OECD observes the euro area to grow at a projected 2.1 pc in 2017 and a 1.9 pc in 2018. The upward revisions were attributed to the stronger growth in key European countries.

Germany is likely to grow by 2.2 pc in 2017 and 2.1 pc in 2018, France by 1.7 pc in 2017 and 1.6 pc in 2018, while Italy will see a 1.4 pc growth rate this year and a 1.2 pc rate in 2018.

The revised projections reflect stronger-than-expected performance in the first half of 2017, in the context of rising employment rates, accommodative monetary policy and reduced political uncertainty. The upswing is also driven by stronger consumption growth and investment, as well as healthy export growth.

In the United Kingdom (UK), the previously identified growth slowdown is expected to continue through 2018, while uncertainty remains over the outcome of negotiations around the decision to leave the European Union. Although, the unemployment rate has fallen to below 4.5 pc, weak productivity and real wage growth persist. According to the OECD report, the UK is projected to grow by 1.6 pc in 2017 and 1 pc in 2018.

OECD in its Interim Economic Outlook concluded with renewed calls on policymakers to enact a rebalancing from monetary to fiscal and structural support for growth and wages. It called for better use of tax and spending policies to achieve more inclusive growth and says increased structural reform efforts will be needed across all countries to boost productivity, wages and skills.

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