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WB blames policy drift, weak industry for India's slowdown

The World Bank has held India's ''policy drift'' and weak industrial performance responsible for the current slowdown in the country's economy, making it difficult to sustain its higher growth path.

In its new report, The Global Economic Prospects, which was released in Washington today, the international lending agency says the Indian economy slowed to five per cent in fiscal 1997-98, following three years of rapid advances averaging 7.5 per cent.

While a decline in agricultural output was a contributing factor, non-agricultural GDP growth had begun to slow down in 1996-97.

To reduce poverty and raise standards of living fast, the economies of South Asia -- and their 1.2 billion people -- need to accelerate growth rates to seven per cent and keep them there, it adds.

It says the growth picked up significantly between 1992-96 following trade and investment liberalisation and significant depreciation of real exchange rates, especially in India. Favourable global economic conditions helped out, giving exports and foreign direct investment inflows a boost.

But, new challenges are clouding the region's prospects, from the effects of economic sanctions to wavering attention to reform and worrisome dangers that the trade fallout of the East Asian crisis will impact South Asia, it adds.

The bank report says depressed export markets in East Asia and Japan are a blow since these markets had come to account for a significant share and growth of South Asia's exports. Moreover, competition from East Asia in other markets will slow the growth of exports, especially from India and Pakistan, it adds.

It says the 1998-99 budget contains no ''concrete proposals'' for substantial further reductions in the public sector deficit and proposes to increase revenues through higher excise collections and import tariffs -- potentially a step in the wrong direction.

''If growth targets of over six per cent do not materialise, the total public sector deficit could well persist at more than nine per cent of GDP, representing one of the biggest challenges for the Indian economy,'' it adds.

The World Bank document says industrial output has fallen from 12.5 per cent in 1995-96 to 6.4 per cent in 1996-97 and then declined further to 5.7 per cent in 1997-98. Contributing to the slowdown was the persistence of large public sector deficits (crowding out private investment), a decline in export growth since 1995-96 and cutbacks in investment because of uncertainty about reforms.

It says it was the slight fall in the public sector deficit to 9.1 per cent of GDP due to a cut in subsidies on petroleum products that brought domestic oil prices closer to world prices.

It says domestic financial weaknesses remain a concern and will need to be addressed if the financial system is to be a source of strength rather than a drag on longer-term growth -- as evidenced most recently by a run on desposits with the state-owned investment corporation, the Unit Trust of India. Domestic stock markets, already depressed, slumped further in response.

It says India's export performance shows large recent declines in nominal dollar value though it has been more stable in volume terms.

After three years of high (19 per cent between 1993 and 1996) growth, the World Bank report points out, the growth in the nominal value of export slowed dramatically to 4.6 per cent in 1996-97 and 2.7 per cent in 1997-98 (but volume growth dropped by much less, from nine per cent in 1996 to about six in 1998).

Import value growth also fell, yielding a modest increase in the current account deficit to 1.6 per cent of GDP (the real volume of imports fell reflecting the slowdown in domestic growth).

While the 16 per cent decline in the rupee against the dollar over the past year will offset some of the loss of export competitiveness to ASEAN countries, it points out, competitive conditions for Indian and other south asian growth of European Union and North American markets will remain difficult for some time.

UNI

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