With an expected growth rate of 7.5 per cent this fiscal, India has for the first time topped the World Bank’s growth chart for major economies.
The World Bank’s 2015 Global Economic Prospects report says that India will this year race ahead of China, where growth is likely to moderate to a still robust level of 7.1 per cent. It says that 2015 will most likely be the first full calendar year when India outpaces China in decades.
But the not-so-good news, according to the report, is that the expected hike in the US interest rates could lead to greater financial market volatility and significantly reduce capital flows to emerging countries, including India. In the same breath, it also asked the Fed to hold off rate hikes till 2016.
For the global economy, the World Bank cut its growth forecast to 2.8 per cent this year from 3 per cent estimated in January. It lowered its forecast for US growth this year to 2.7 per cent from 3.2 per cent in January. It expects the euro area to grow 1.5 per cent in 2015 up from a January estimate of 1.1 per cent.
India’s GDP expansion is expected to accelerate to 7.5 per cent in calendar 2015, 7.9 per cent in 2016 and 8 per cent in 2017, says the report. At the same time, over the next three years, China’s economy is projected to slow from 7.1 per cent this year to 7 per cent in 2016 and 6.9 per cent in 2017. But the expected lift off in US interest rates could lead to a reduction in capital flows to emerging countries by up to 1.8 percentage points of GDP, it says.
“While emerging economies may hope for the best from the eventual lift off of the US policy rates, they need to prepare for the worst,” says the report.
As a large, financially open emerging market economy, India remains exposed to volatility in global financial markets and shifts in global portfolio allocations that may follow policy rate hikes in the US, expected later this year.