Great News: IMF and World Bank Laud India’s Potential To Achieve Viksit Bharat By 2047

The February report of IMF comes as welcome news as it has appreciated India's economic growth in spite of recent setbacks. It projects India's growth outlook for 2024-25 and 2025-26 at 6.5 per cent. This compares well with the recent release of the second advance estimates of annual GDP for 2024-25, which put it at 6.5 per cent for 2024-25 with a nominal growth rate of 9.9 per cent.

As per the first revised estimates, real GDP growth grew by 9.2 per cent in 2023-24, while for 2022-23 at 7.6 per cent.

Compared to the earlier years, the growth rate projected for 2024-25 is substantially lower as there has been considerable fall in manufacturing from 14 per cent to 3.5 per cent, mining from 4.7 per cent to 1.4 per cent, electricity, gas, water supply and other utility services from 10.1 per cent to 5.1 per cent, construction from 10 per cent to seven per cent as compared to 2023-24. There has been revision to Q2 25 growth rate to 5.6 per cent as against 5.4 per cent projected earlier and the 2024-25 Q3 growth is estimated to grow at 6.2 per cent.

The growth expected for 2024-25 and 2025-26 is much better than the other countries particularly in the background of global geopolitical and trade uncertainties.

The IMF executive board report states that deepening geo-economic fragmentation could affect external demand and regional conflicts could lead to volatility in oil prices and India is a major importing country.

Other risks are that the recovery in private consumption and investment are not up to the expected levels because real incomes do not recover sufficiently. Among other risks are heat waves and while insufficient or excess rainfall due to weather shocks could adversely affect agricultural output. As prices rises, rural demand may slump. Some of the suggested measures include implementation of structural reforms like labour, land reforms, ease of doing business with more deregulation, strengthening human capital, supporting greater participation of women in labour force, creating more employment opportunities, conducive environment for FDI flows, and rationalizing both tariff and non-tariff reduction measures for increased trade integration. It should be noted that accelerated private sector investments along with employment opportunities are paramount to enhance the growth rate.

It is heartening to note that all these suggestions are getting the priority they need from the government. IMF Directors opine that "India's strong economic performance provides an opportunity to advance critical and challenging structural reforms to realise the ambition of becoming an advanced economy by 2047". The global agency has appreciated India’s fiscal prudence and its road map for government debt to GDP reduction to 50 per cent at the central government level by 2031.

The report recommends "continued well-calibrated fiscal consolidation over the medium term to rebuild buffers, ease debt service and reduce debt. The central government has followed a policy of fiscal restraint by focussing on higher domestic revenue mobilisation and at the same time keeping a control on expenditure with thrust on quality of expenditure, particularly on capex both at the Centre and state levels and encouraging states to take up reforms in power sector, infrastructure development and providing 50-year interest-free loans and additional fiscal budget for such requirements.”

They have called for a more holistic fiscal framework that includes state and central governments, as well as more detailed fiscal deficit path with sufficient flexibility that could be used as an operational guide.

While welcoming RBI’s calibrated monetary policy, IMF has recommended greater exchange rate flexibility as the first line of defence in absorbing external shocks with foreign exchange interventions limited to addressing disorderly market conditions. It is to be recalled that there were some adverse comments in last year's staff assessment as regards foreign exchange interventions.

The RBI has always maintained that the foreign exchange interventions are only meant to curb unnecessary volatility. Some IMF directors also saw the need for foreign exchange interventions in other cases noting the limitations in the current global financial safety net.

A new World Bank report, released on February 28, notes that India will need to grow by an average of 7.8 per cent over the next 22 years to achieve the country's high income status hopes by 2047. Suggested measures includes increasing total investment from current 33.5 per cent of GDP to 40 per cent (both in real terms) by 2035, increasing the overall labour participation from 56.4 per cent to above 65 per cent, accelerating overall productivity growth and achieving faster and inclusive growth across the states. Other suggestions include structural transformation, trade and technology adoption, allocating more land, labour and capital for manufacturing and service sectors.

India cannot remain at the current projected growth of 6.5 per cent for the year 2025-26 as it needs an average growth of 7.8 to eight per cent to ensure that the path towards a developed economy turns into a reality.

The per capita income should also be bolstered suitably. Apart from pursuing the suggestions of IMF and World Bank, there is a need for the private sector to enthusiastically come forward with higher investment to realise the avowed goal of Viksit Bharat by 2047.

(The author is former Chairman & Managing Director of Indian Overseas Bank)