By Ankit Panda
January 21, 2015
On the heels of China posting its lowest GDP growth rate in almost 25 years, the International Monetary Fund released an update to its World Economic Outlook report predicting that India’s economy will overtake China in terms of its annual growth rate by 2016. The IMF released estimates predict that India’s economy will grow at 6.3 and 6.5 percent respectively over the next two years. This puts India’s projected growth in 2016 ahead of the organization’s estimates for China (which stand at 6.8 and 6.3 percent for 2015 and 2016, respectively), leaving India the fastest growing major emerging economy in the world. The IMF’s projections represent a substantial increase from the actual growth rates of the Indian economy in 2013 and 2014, when the economy grew by 5 and 5.8 percent respectively. The IMF’s World Economic Outlook (WEO) projects global economic growth at 3.5 and 3.7 percent in 2015 and 2016 respectively.
The IMF’s reasoning is based primarily on high expectations for Indian Prime Minister Narendra Modi, who has been in office for almost 8 months after winning May 2014′s general election. Gian Maria Milesi-Ferretti, deputy director of the IMF’s Research Department, told the Times of India that the “reform plans of the new prime minister are promising.” However, Milesi-Ferretti cautioned that the implementation of Modi’s planned economic reforms will be “key.” The prime minister’s first eight months in office have resulted in modest attempts at economic reform, but have fallen short of the expectations of many observers. Most notably, Modi has taken concrete steps to make manufacturing a greater proportion of India’s GDP (primarily via his “Make in India” initiative).
Global factors also look promising for the Indian economy. For example, the ongoing slump in world oil prices will stimulate the Indian economy by freeing up capital for other uses, including investment in infrastructure and public services. India is a major importer of oil. Despite the positive expectations surrounding the Indian prime minister’s economic reform initiatives and favorable external factors, the Indian economy still suffers from negative factors. The new Indian government, despite its overwhelming legislative mandate, has found it difficult to dismantle older regulations that make India an unfavorable or excessively risky investment destination. For example, the Modi government has done little to attract investors by alleviating the negative effects of unlimited liability clauses for foreign suppliers, lax patent rules, and generally cumbersome government bureaucracy — factors that remain from India’s previous Congress-led government.
The IMF’s recent estimates are similarly supported by the United Nations World Economic Situation and Prospects (UN WESP) report, which noted that India will post a “smart recovery” in 2015. The report nonetheless was less bullish than the IMF’s 2015 estimate for India, placing growth at 5.9 percent. The UN WESP’s 2016 prediction is in line with the IMF’s estimate.
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