India Not Realizing Full Potential

A new UN report flags subdued private investment in India as a major concern, which has declined as share of GDP from 40% in 2010 to 30% in 2017.

Subdued private investment and “fragilities” in India’s banking sector have been flagged as major concerns keeping the Indian economy from realizing its full potential, a new United Nations report on the state of world economy says, PTI reported.

“The anemic performance of private investment remains a key macroeconomic concern. Gross fixed capital formation (the percentage of the investment made each year out of the total GDP) has declined from about 40% in 2010 to less than 30% in 2017,” the World Economic Situation and Prospects report 2018, released in New York on Monday, says.

The report, prepared by the United Nations Department of Economic and Social Affairs, is a flagship publication on expected trends in the global economy. The WESP report forecasts a growth rate of 7.2 and 7.4% in years 2018 and 2019 respectively, an improvement over the current year’s growth projection of 6.7%.

Sebastian Vergara, an economic affairs officer at the UN, however, said that the Indian economy had the potential to “grow at 8% over the next 20 years,” but it was being held back by a range of structural and policy flaws.

“In order to materialize the potential, boosting private investment has to be made a key policy priority of the Indian government,” Vergara told National Herald over the phone from New York after the release of the report.

He added that the Indian government should be working more efficiently towards structural and banking reforms, besides further liberalizing the foreign direct investment regime, to help uncover India’s economic potential.

 Real Picture Lacking

Despite the concerns, the report says that the outlook for the Indian economy remained “largely positive, underpinned by robust private consumption and public investment as well as ongoing structural reforms.”

Vergara said that recapitalization of state-owned banks and recent changes to India’s bankruptcy laws were a step in the right direction that would boost private investment in the medium-term.

The UN expert called the demonetization exercise last year as a short-term disruption that nevertheless caused major liquidity crunch in India’s “informal economy. The official data doesn’t show the real picture. But one can’t understate the role of the informal economy in India,” Vergara said.

Vergara said that the introduction of the Goods and Services Tax and the ongoing efforts at simplification of the FDI rules were sending out positive signals to investors.

The UN report notes that the global economy grew at an average of three per cent in 2017, the highest growth rate since 2011. “Global growth is expected to remain steady at 3% in 2018 and 2019,” it says.