The World Bank has predicted a GDP growth rate of 8 percent for India by 2017 and said that a strong expansion in the country, coupled with favourable oil prices, would accelerate the economic growth in South Asia.
In India, GDP growth is expected to accelerate to 7.5 percent in fiscal year 2015/16. It could reach 8 percent in FY 2017/18, on the back of significant acceleration of investment growth to 12 percent during FY 2016-FY 2018, the bank said in its semi-annual report.
The country is attempting to shift from consumption to investment-led growth, at a time when China is undergoing the opposite transition, it said. The bank’s twice-a-year South Asia Economic Focus report projected steady increase in regional growth from 7 percent in 2015 to 7.6 percent by 2017 on grounds of strong consumption and increasing investment.
Given India’s weight in regional Gross Domestic Product, the projections reflect to a large extent India’s expected growth acceleration, driven by business-oriented reforms and improved investor sentiment.
The decline in oil prices has been reflected in the domestic prices of oil products to different extents across the region. The pass-through exceeded 50 percent for most oil products in Pakistan, but was nil in Bangladesh, it said. Together with favorable food prices, cheaper oil has contributed to a rapid deceleration of inflation.
South Asia went from having the highest inflation rate among developing regions to having the lowest in barely one year. In March 2013, the Consumer Price Index (CPI) of the region had increased by 7.3 percent year-on-year compared to 1.4 percent in March 2015, the report said.
“The biggest oil price dividend to be cashed in by South Asia is one yet to be earned, but it is not one that will automatically transit through government or consumer accounts,” said World Bank South Asia Chief Economist Martin Rama.
“Cheap oil gives the opportunity to rationalize energy prices, reducing the fiscal burden from subsidies and contributing to environmental sustainability,” he said.
The report noted India has already taken encouraging steps to decouple international oil prices from fiscal deficits and to introduce carbon taxation to address the negative externalities from the use of fossil fuels. The challenge will be to stay the course in the event of oil price hikes, something that may well happen in the medium- term.
“Savings from reduced subsidy bills could be used to address the crying needs of the region in terms of infrastructure, basic services and targeted support for the poor,” said World Bank Vice President for South Asia Annette Dixon.
The report shows that households in the region stand to gain from lower oil prices, both directly through lower energy spending and indirectly through faster growth. But except for kerosene, richer households spend more in oil products, and stand to gain more.