With economic reforms gaining momentum, India’s long-term growth prospects remain bright, says the World Bank’s India Development Update, a biannual analysis of the Indian economy.
The report finds that growth has rebounded significantly due to strong industrial recovery. Capital flows are back signaling growing investor confidence, the exchange rate has stabilized, and financial sector stress has plateaued. Economic growth is expected to rise to 5.6 percent in FY15, strengthening to 6.4 percent in FY 2016 and 7.0 percent in FY 2017.
Although these projections could face risks from external and domestic shocks in the short term, downside risks can be offset by further progress on the reform agenda.
Implement GST and dismantle inter-state check posts
Implementing the Goods and Services Tax (GST), for instance, can transform India into a common market and dramatically boost the competitiveness of the manufacturing sector. This sector’s share in India’s GDP – at some 16% - has remained largely unchanged over the past two decades and is relatively low compared to the 20% plus shares in Brazil, China, Indonesia, Korea and Malaysia, even when per capita incomes of these economies were similar to India’s levels today.
The impact of the GST can be further enhanced if inter and intra state check posts are systematically dismantled, allowing goods to move efficiently throughout the country. Currently, truckers in India lose 60% of transit time at road blocks, tolls and other stoppages, leading to logistics costs that are 2-3 times higher than international benchmarks. If this time is cut by half, logistics costs could fall by some 30-40%, making Indian manufacturing more competitive internationally, and leading to higher job creation.