India Business Insights

Indian economic growth slows again

Anuj Chande Anuj Chande

India shows the lowest growth rate since the fourth quarter of 2014 but reforms to attract foreign investment bear fruit.

The Indian economy grew 6.1% year-on-year in the first quarter of 2017, slowing from a 7% expansion in the previous quarter. This was the fourth consecutive quarter of slowing economic growth and the lowest growth rate since the fourth quarter of 2014 1. This was mainly driven by a slowdown in consumer spending and a drop in investment following the demonetisation in November 2016. This removed 86% of India's currency in circulation, leading to a severe cash crunch and disrupted business especially in largely cash-based sectors. 

Table 1. Key economic indicators – India

  Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017* *Period for Q2-2017 for which data was available
GDP (annual growth rate) 6.50% 7.90% 7.50% 7.00% 6.10% NA Apr
GDP (growth rate) 1.80% 2.30% 1.40% 1.60% 1.50% 1.50% Apr-May
Inflation rate 5.25% 5.66% 5.16% 3.74% 3.54% 2.59% Apr-May
Balance of trade -6437.2 -6411.3 -7925 -11179.7 -9724.8 -13545.4 Apr-May
Consumer price inflation 126.1 128.7 131 131 130.5 131.3 Apr-May
Wholesale price inflation -0.79% 1.38% 3.71% 3.61% 5.26% 3.01% Apr-May
Foreign direct investment (US$ million) 2912 2314.7 4742.3 2501.3 1540.7 3581 Apr
Industrial production 5.70% 7.80% 5.20% 4.40% 2.90% 3.10% Apr
GDP at constant prices (INR billion) 28427.4 30422.9 29418.5 29788.2 30407.6 32284.3 Apr-May

 * Q2 2017 does not include information pertaining to the entire period April to June 2017.
Source: Trading Economics2

According to the Central Statistics Office, growth in Q1 2017 declined across most sectors of the economy, including manufacturing, mining, trade, hotels, transport, communication, broadcasting, financial, real estate and professional services 3. The construction sector was the hardest hit with a 3.7% decline compared to 6% growth in Q1 2016.

Gross value added (GVA) growth at constant prices fell to a mere 5.6% in Q1 2017, clearly showing the scars of demonetisation on the economy4. The slowdown in the GDP growth rate may put pressure on the Reserve Bank of India to cut interest rates to balance its inflation targets given the need to stimulate economic growth.

Some experts are predicting the country’s economic growth rate should reach double digits in the medium term due to the roll-out of the new Goods and Services Tax (GST) from 1 July 2017, though there is concern among some commentators that the impact of GST is being over-estimated.

However, there is also positive news coming out of India this quarter. According to the Department of Industrial Policy and Promotion (DIPP), total foreign direct investment (FDI) in India during the 2017 fiscal year rose 8% year-on-year to around US$60 billion, indicating that the government's effort to make it easier to do business in India and relaxation of FDI rules is yielding results.

Key government initiatives to boost FDI:

  • The Union Cabinet has approved raising of bonds worth US$365.63 million by the Indian Renewable Energy Development Agency, which will be used in various renewable energy projects in the 2018 fiscal year.
  • The government plans to scrap the Foreign Investment Promotion Board, which would enable foreign investment proposals requiring government approval to be cleared by the ministries concerned, where required.
  • The government has approved 100% foreign direct investment (FDI) in financial services carried out by non-banking finance companies.
  • The Department of Industrial Policy and Promotion now allows 100% foreign direct investment in asset reconstruction companies under the automatic route, which makes approval more straightforward and will help to tackle the issue of declining asset quality of banks.
  • The government has amended the FDI policy regarding the construction development sector. The amended policy includes easing of area restriction norms, reduction of minimum capitalisation and easier exit from projects. In addition, to provide a boost to low-cost affordable housing, it has indicated that area restriction and minimum capitalisation norms will not apply to cases committing 30% of project cost to affordable housing. 

Sources:

  1. IBEF
  2. Trading Economics
  3. Indiatoday
  4. Livemint