Sindhu Bhattacharya is a senior journalist. writing on business and economy. She has worked across daily newspapers as well as digital publications and was the Contributing Editor to CNBCTV18, India’s largest business news channel.
Two years have passed since demonetisation crippled the Indian economy and though some economists believe the shock and awe unleashed by this single decision of the Modi government may not have been fully absorbed even now, recovery has begun. In addition to demonetisation, the Goods and Services Tax (GST) regime also came into force from July 2017 and coupled with some severe global headwinds, including oil price shocks later, the Indian economy did face real rough weather in the second half of this government’s term. But green shoots are beginning to emerge, as industrial growth picks up, oil prices soften and effects of demonetisation etc., begin to wane.
According to Fitch Ratings, the Indian economy grew by 7.1 per cent as an annual average in five years between 2013-2017, slowed to 6.7 per cent in 2017-18 but is now picking up again with the full year forecast for 2018-19- being 7.2 per cent. The rating agency has gone on to forecast 7 per cent growth for 2019-20 and 7.1 per cent for 2020-21.
In 2018-19, GDP growth has picked up after a lag and been robust in the first half, partly because of the low base of the previous year. The manufacturing sector is reviving after making massive adjustments to the GST regime, and agricultural production is also improving significantly. And even though the economy is expected to slow down in the second half of this fiscal compared to the same period last year on a higher base, overall growth for the full year should remain robust.
And as per the first advance estimates released by the CSO (Central Statistical Organisation) this week, the forecast of 7.2 per cent GDP growth for the full year 2018-19 puts India in the front of the global economic pecking order. Yes, this number is still a tad lower than expected as the Reserve Bank of India’s (RBI’s) estimate was 7.4 per cent and the finance ministry’s projection was of 7.5 per cent growth. But 7.2 per cent growth will still be higher than the 6.7 per cent seen in the previous fiscal so in this, at least, it is a leg up. The CSO estimates put second-half GDP growth at 6.8 per cent and a clearer picture will likely emerge when the second advance estimates are released next month.
As per projections by the CSO, manufacturing is expected to grow at 8.3 per cent this fiscal against 5.7 per cent in FY18; construction at 8.9 per cent (5.7 per cent). In the services sector, trade, hotels, transport, communication services and public administration will grow at a slower pace in FY19, while financial, real estate, and professional services are expected to grow at a marginally faster pace. Agriculture is projected to grow at 3.8 per cent in FY19, marginally higher than 3.4 per cent in FY18.
So the Modi term will end with a reasonable growth in GDP. How has the economy done in the first four years of this government’s term? On its part, the Finance Ministry has said that the government made “significant” strides in the last four years in terms of welfare, the overall structure and growth of the economy and in creating a strong presence as an emerging global power. The ministry said GDP growth was 7.2 per cent in the first half of this fiscal, current account deficit stood at $15.8 billion in Q1 while trade deficit was $45.7 billion and CPI was 3.9 per cent in the September quarter.
The share of the Indian economy in the world (measured as a ratio of India’s GDP to world’s GDP at current US$) increased from 2.6 per cent in 2014 to 3.2 per cent in 2017 (as per World Development Indicators database). The average growth of the Indian economy during 2014-15 to 2017-18 was 7.3 per cent, fastest among the major economies in the world. And the ministry further said that the Indian economy is projected to be the fastest growing major economy in 2018-19 and 2019-20 (International Monetary Fund October 2018 database). This is borne by GDP growth of 7.6 per cent in the first half of 2018-19 (and now after the first advance estimates put out by the CSO).
Leading industry chamber, the Confederation of Indian Industries (CII), has concurred with this rosy picture presented by the government, saying India remained the fastest growing major economy in 2018 and is expected to continue to shine in 2019. CII’s positive outlook is buttressed by strong drivers emanating from the services sector, infrastructure including construction equipment and better demand conditions arising out of election spending. “Better demand conditions, settled GST implementation, capacity expansion resulting from growing investments in infrastructure and continuing positive effects of the reform policies undertaken and improved credit offtake especially in services sector at 24 per cent will sustain the robust GDP growth in the range of 7.5 per cent in 2019,” said CII Director General Chandrajit Banerjee.
Rating agency CARE Ratings has said in a note that in 2018, particularly, volatile oil prices and exchange rates combined with conflicting signals from inflation, where farmers were stressed on account of low prices and core inflation remained intransigent and affected decisions of the Reserve Bank of India (RBI) on monetary policy. Industries had varied performance mainly due to differing effects of overall growth as well as the effects of GST, which skewed numbers and contributed to the ‘base effect’ argument when interpreting economic numbers.
Aided by a favourable base effect as well as some momentum in both consumer goods and capital goods, IIP (Index of Industrial Production) growth for the first seven months of 2018-19 was “quite satisfactory” at 5.6 per cent against 2.5 per cent in the same period last year. The growth of 8.7 per cent in capital goods, 9.4 per cent in durables helped manufacturing move up by 5.7 per cent so far this year.
In terms of the core sector or infrastructure, industries growth has been impressive for electricity, cement and coal during this period. Positive spending by the government has helped to maintain this growth rate.
The capacity utilisation rate, which is a good indicator of the spare capacity in industry which in turn gives a signal of future investment, increased in Q3 (September to December 2017) and Q4 (January-March 2018) of FY18 at 74.1 per cent and 75.2 per cent respectively, but declined to 73.8 per cent in Q1 FY19 (April-June 2019).
And CII observed that despite 2018 witnessing external vulnerabilities arising out of rising oil prices, trade wars between major global trading partners and US monetary tightening, the Indian economy stood out as the world’s fastest-growing major economy. The chamber has, however, listed seven key drivers for growth that need to be fostered and has suggested policy actions for robust GDP growth to continue in 2019.
1) Lowering the number of GST tax slabs to three - a standard rate, a higher rate for demerit goods and a lower rate for some mass consumption items. The GST Council should also consider extending GST to excluded sectors such as fuels, real estate, electricity and alcohol.
2) The Insolvency and Bankruptcy Code (IBC): The government should consider setting up additional benches of the National Company Law Tribunal to spread geographically to strengthen the judicial infrastructure for an easier and faster exit of distressed businesses.
3) On Ease of Doing Business: Government should digitize land records, online single window systems in states and enforce contracts for even more improvements in ease of doing business.
4) In measures to unlock agricultural markets, it is important to persuade states to implement the Agriculture Produce and Livestock Marketing Model Act, which has been implemented in just four states. Also, implementation of e-NAM mandis should be prioritised, to promote inter-state trade and improve E-NAM handling share from the current 4.5 per cent.
5) In the immediate term, credit availability has been a challenge, particularly for the micro, small and medium enterprises. Credit flow to industry grew by only 2.3 per cent in H1 (April-September) of the current financial year. RBI should introduce measures such as revisiting lending restrictions of PCA banks, opening of a limited Special Liquidity Window to meet emergencies of financial institutions (including Mutual Funds) besides others to improve liquidity in the system.
6) India needs to continue guarding against the risks of higher oil prices by increasing domestic production of oil, providing a special window for Oil Marketing companies to procure oil and stepping up diplomacy with the USA to continue to secure purchase from Iran. This would also help in effective exchange rate management, CII added.
7) While the fiscal deficit target of 3.3 per cent is expected to be fulfilled, the government should continue its strong program of infrastructure development, including roads and highways, airports, waterways, and ports. This would provide the necessary growth impetus for downstream industry sectors as well as generate employment opportunities.
Meanwhile, despite the green shoots on the economic front, problems persist. Fitch has noted that India’s banking sector continues to struggle with a high proportion of nonperforming assets, while non-banking financial institutions (NBFIs) face tighter access to liquidity following the default of IL&FS, one of the 30 biggest NBFIs in India.
NFBIs have accounted for a large share of all lending in recent years and have expanded credit rapidly. The rating agency has suggested that fiscal policy should continue to support growth in the run-up to elections in early 2019.
Stepped-up public investment has helped to stem the downward trend in the investment/GDP ratio, boosted by infrastructure spending. There have also been measures to support rural demand.
Besides, other measures announced to ease liquidity in the system have helped some. But still, the big question which remains is this: since external shocks like oil prices etc., are outside India’s control, how eager will the new government be to take more fiscal steps to support growth?