India needs to maintain reform momentum to spur private investment: World Bank

India needs to maintain its reform momentum to spur private investment and exports and reverse the current slowdown, the World Bank (WB) said in its India Development Update report on Wednesday.

However, the global lender warned of projecting a steeper contraction for the economy in its revised outlook scheduled for October, in light of the continued spread of the virus and deteriorating financial sector and global conditions.

While it stuck to its May projection of -3.2% growth in the ongoing fiscal, the WB said, “In the current, rapidly evolving context these projections are likely to be revised as new information is incorporated, especially as the daily number of cases continues to increase resulting in several states and districts re-imposing lockdowns.”

“In our revised projections, which would be available in October 2020, we would likely project a steeper contraction in the economy,” it added.

Further, while global prospects remained muted, demand revival would be significantly delayed as neither private consumption, nor government spending, nor external demand would be available to boost aggregate demand, it said.

In terms of public finances, the WB saw India’s fiscal deficit touching 6.6% of gross domestic product (GDP) in the ongoing fiscal stating it would stay elevated at 5.5% in the coming year. It also forecast elevated public debt levels to peak at 89% of GDP in FY23 before declining.

The report identified five major areas for reform which largely focused on the financial sector. Maintaining financial sector stability was critical, it said, suggesting the Reserve Bank of India to further strengthen the sector’s safety nets and liquidity and capital buffers.

“Countries that invest in sectoral reforms – infrastructure, labor and land, human capital — and ensure that their national systems are connected to the Global Value Chains, are more able to respond to uncertainties and are better placed to take advantage of any global shifts,” said Junaid Ahmad, WB country director in India.

According to the report, reforms were needed to deepen capital markets to increase the availability of long term finance, especially to help banks tide over asset-liability mismatches.

Apart from supporting non-banking financial companies in channeling credit to the real sector, the WB also proposed exploring the role of fintech lenders in providing low-cost credit to micro, small and medium enterprises to restart activities post the lockdown.

Further, it recommended scaling back the priority sector lending policy for public lenders and to consider a mix of private capital injections in state banks, and even full privatisation in some cases.


“It is encouraging that the government is moving to a more selective and strategic public sector footprint in the financial sector. International experience shows this can boost the banking sector’s ability to support credit, facilitate effective financial intermediation, and reduce fiscal exposure,” said Poonam Gupta, lead economist and Dhruv Sharma, senior economist at the WB.

Enhancing such reforms would put the economy back on the 7% growth path last seen in FY18, the report said.