GST uncertainties have affected India’s economic momentum: World Bank

In a report, the World Bank said GST is expected to disrupt the economic activity in early 2018 but has a momentum to pick up

According to the latest report by World Bank, India’s economic momentum has been affected by the disruptions from demonetization and the uncertainties around the Goods and Services tax. Due to this, the growth is expected to slow down from 8.6% in 2015 to 7% in 2017. With the implementation of sound policies around the public spending in private investment, the growth could be accelerated to 7.3% by 2018.

It is expected that sustained growth will translate to a reduction in poverty and more focus could help benefit the informal economy to a large extent. A fall in the growth rate of the country has also affected the growth rate of South Asia. As a result, South Asia has fallen to the second place after the East Asia and the Pacific. In the India section of the report, the Bank mentioned that one time policy events, which include demonetization and GST, have slowed the country’s economic momentum in 2016. The real GDP growth slowed to 7.1% in 2016 from 8% in 2015 and further to 5.7% in the first quarter of 2017.

GST has had a significant impact across various sectors in the country. On one hand, the overall demand slowed as public investments started to come down. On the other hand, public and private consumption gained pace with the implementation of the 7th pay commission recommendations and due to the revival in the rural demand after a normal monsoon. The report mentioned that GST is expected to disrupt economic activity in the early months of 2018, but it has enough momentum to pick up.

Evidence suggests that post GST, manufacturing and services contracted by a significant rate, however, the sectors are expected to stabilize within a quarter by maintaining the annual GDP growth at 7% in 2018. Growth is projected to increase gradually to 7.4% in 2020 with a recovery in private investments which are expected to be crowded in by the recent increase in public capital expenditure and an improvement in the investment sector due to the Bankruptcy Code and partly due to GST.

The most significant medium term risks can be associated with private investment recovery, which continues to face several domestic impediments which include corporate debt overhang, regulatory and policy challenges in addition to the risk of an imminent increase in the US interest rates. If the internal bottlenecks are not resolved, subdued private investment would put down pressure on the country’s potential growth. Further, downside risks to the global economy are substantial given the possibility of monetary policy normalization in the USA.