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What India Needs to Do to Stay Ahead
Thu, 6 Oct Pre-Open

India's gross domestic product (GDP) growth rate of 7.6% means that the country has the fastest pace of growth among large economies. The International Monetary Fund (IMF) in its latest assessment has increased India's growth forecast to 7.6% for the present year and the next year as well. According to the IMF, the country has shown a strong recovery benefitting from large improvement in terms of trade, effective policy actions and external conditions. These forecasts will mean that India will grow at a much faster rate than China which will see its growth rate at less than 7% in both the years.

The global economy especially the US, Europe and Japan however, continues to struggle with slow or negligible growth coupled with increasing debt, low or negative interest rates and the precarious nature of the recovery even eight years after the global financial crisis. This slowdown can result in stagnation.

India has benefited immensely from lower commodity prices, and inflation which has declined more than expected. The country's current account deficit numbers came in at a low $300 million for the June 2016 quarter. Since crude and gold are the biggest drivers in the value of imported goods, a significant decline in prices of crude as well as stable demand for gold has helped contribute to fall in imports. The present government is pushing for further reforms.

To strengthen the decision making process, a new monetary policy committee has been established which decides on setting interest rates. Further the central bank has now set an inflation target of 4% till March 2021, within a tolerance band of two percentage points (2-6%). The implementation of the Goods and Services Tax (GST) will also be a huge positive for the economy. The IMF too has said that the country needs to bring in further structural reforms to address underlying inflationary pressures due to bottlenecks in food storage and distribution so as to keep inflation in the target range.

We think that India should not just rest on its reportedly high GDP numbers. Structural reforms are of essence here. There is a need to resolve the huge debt of power distribution companies. Additionally, labour market reforms are essential to capitalise on the country's demographic dividend. Since banks play an important role in providing credit to the economy, measures must be taken to strengthen the bank balance sheets of weak public sector banks.

All of these factors and more are the need of the hour for India to truly keep shining in the long term.

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May 23, 2017 (Close)

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