Indian economy projected to grow 8%

Despite registering a tepid growth in the April-June quarter, Asia’s third biggest economy is expected to gain strength amid broadening of the domestic consumption base, maintaining its tag of the world's fastest growing large economy.

American rating agency, S&P Global Ratings, has projected that Indian economy will touch 8 per cent growth over the next few years supported by the ongoing momentum in India’s structural reforms, most recently with the passage of the goods and service tax (GST).

The newfound faith in the Indian economy is largely backed by the measures taken by the Modi government since taking office in May 2014. India has now successfully managed to improve its competitiveness and ease of doing business rankings. Reforms like passage of GST is expected to remove the cascading effects and the inefficiencies created by different layers of taxes across states and the central government.

Easing of restrictions on Foreign Direct Investment (FDI) will now foster productivity growth in some sectors. The bankruptcy law, improved access to bank accounts and measures aimed at easing business starts would surely push up the economic growth.

Further, a normal monsoon in fiscal 2017 is expected to give thrust to the agricultural growth, pushing it above the trend level, given the current low base due to two successive monsoon failures. This should lift the sagging rural consumption demand and boost the overall GDP growth. Fortunately for India, weather forecasters accord a higher probability for normal monsoon.

However, inflation still remains a risk, given the large weights on food, fuel, and other volatile items in the Reserve Bank of India's target basket. In terms of the monetary policy framework, the Government of India has notified a CPI inflation target of 4 per cent, within a tolerance band of 2 per cent-6 per cent until March 2021. Such a scenario would help to anchor inflationary expectations. In addition, a favourable base effect as well as an improved crop sowing dynamics will ensure that CPI inflation remains within this tolerance band in the near term.

Going forward, growth in fiscal 2017 will also find support from higher pensions announced by the government, coupled with above-average monsoon and lower interest rates.

Latin Manharlal

India’s Q1 GDP Growth Slows

Indian economy grew at its slowest pace in two years in the April to June quarter, amid sluggish investment and farm output, potentially making the government’s target of achieving 8 per cent growth this year more daunting.

Gross Domestic Product (GDP) in India rose by 7.1 per cent in the first quarter of FY 2016-17 from 7.5 per cent in the year ago period, data released by the statistics office showed.

The previous low was 6.6 per cent GDP growth recorded in the October-December quarter of the 2014-15 fiscal.

The slowdown was primarily attributed to lower activity in farm, mining and construction sectors. Mining dipped into negative territory (-0.4 per cent) and construction disappointed (1.5 per cent). During the same quarter last year, these sectors grew 8.5 per cent and 4.5 per cent, respectively.

The dwindling private investments also took a toll on India’s growth number. The Gross Fixed Capital Formation which is an indicator of investment activity in the economy, fell 3.1 per cent in real terms in the April-June quarter, signaling that the private investment sentiment remained weak. The decline in investment is despite government pushing public investment. This can be due to excess capacity in the private sector and a high level of debt in sectors such as construction and infrastructure.

Private consumption, the major driver of the country’s economy, also grew at a weaker pace of 6.7 per cent against 6.9 per cent, the year before. However, growth in this segment may improve over the next few months in the wake of a better monsoon and increase in the wages.

However, even with lower-than-expected growth, India remains the fastest growing major economy, with China registering 6.7 per cent growth during June quarter. The sectors that supported India’s economic growth included, manufacturing (9.1 per cent) and electricity (9.4 per cent), performing better than the same quarter a year ago. Agriculture and services more or less managed to stay in the positive zone.

Going ahead, good monsoons combined with pay hikes to the central government employees are likely to push economic growth in the remaining quarters of 2016-17.

Latin Manharlal