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India reforms pay off

The Indian economy grew 7.2% in Q4 2017, well above expectations and the strongest year-on-year growth since Q3 2016, boosted by a jump in investment and public spending.

India’s trade deficit narrowed as import growth slowed. Meanwhile the government continues to liberalise foreign direct investment in the country, creating one of the largest markets for foreign investors in the world.

Rank Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 *Q1 2018 for which data was available
GDP annual growth rate 9.2% 7.9% 7.5% 7.0% 6.1% 5.7% 6.5% 7.2%    
GDP growth rate 2.4% 1.6% 1.5% 1.3% 1.6% 1.5% 1.8% 1.8%    
Inflation rate 5.26% 5.67% 5.17% 3.75% 3.54% 2.24% 3.0% 4.56% 4.76% Jan - Feb
Balance of trade -6437.2 -6411.3 -7925.0 -11179.7 -9724.8 -13350.3 -10691.4 -14242.7 -14138.8 Jan - Feb
CPI 126.1 128.7 131.0 131.0 130.5 131.5 134.9 137.0 136.7 Jan - Feb
WPI -2.27% -0.70% 1.03% 1.73% 5.26% 2.34% 2.75% 3.73% 2.66% Jan - Feb
FDI (USD million) 2912.0 2314.7 4742.3 2501.3 1540.7 3176.7 4365.3 1519.3 1921.0 Jan
Industrial production 5.77% 7.80% 5.27% 4.40% 2.90% 1.93% 3.30% 5.90% 7.50% Jan
GDP constant price (INR billion) 30422.94 29534.21 29835.37 30320.91 32284.27 31208.59 31762.51 32495.6    


India’s 7.2% rate of GDP growth in the last quarter of 2017 was well above an already upwardly-revised estimate of 6.5% and the 6.3% seen in the previous quarter. This came on the back of a rebound in industrial activity, especially manufacturing and construction, and an expansion in agriculture.

These latest growth figures allowed India to reclaim the mantle of fastest growing world economy from China, which recorded growth of 6.8%. 

The revival theme has been echoed in a number of key sectors, including cement, electricity, coal, refinery products and steel, which have all had a strong start to 2018. Growth started to pick up in the third quarter of 2017 following a lull in the April-June period. This was due to destocking in the run-up to the rollout of Goods and Services Tax (GST) and the lingering impact of demonetisation1.

The economic data remains largely encouraging, with various indicators showing the recovery carrying over into the first quarter of 2018. This more robust GDP picture reflects higher growth in government consumption and increased public capital outlays, although private consumption slackened2.

Gross fixed capital formation surged 12% in Q4 2017, compared to a 6.9% rise in the previous quarter. Stocks were up 6.9%, ahead of the 5.8% increase in Q3 2017. Government spending expanded 6%, also higher than the 2.9% seen in Q3 2017. On the other hand, growth in private consumption slowed to 5.6%, compared to 6.6% in Q3)3.

Trade deficit narrows as import growth decelerates4

Growth in merchandise exports softened for a third consecutive month in February 2018, falling to 4.4% year-on-year from 9.0% in January and totalling USD25.8 billion. The relatively feeble result for February was the result of a broad-based decrease in export growth.

Manufacturing export growth halved, with softer engineering goods, gems and jewellery exports offsetting higher exports of labour-intensive sectors such as electronic goods and pharmaceuticals. Similarly, overseas shipments of agricultural products were weaker compared to the previous month.

Merchandise imports in February expanded 10.5% year-on-year to a total of USD37.8 billion, but this was less than half the 26% surge recorded in the previous month. Lower global oil prices saw oil import growth moderating in February, while gold imports contracted again. Although consumer imports were resilient in February, capital goods imports recorded a noteworthy deceleration.

The deceleration in imports caused the February trade deficit to narrow to a still sizeable USD12.0 billion from USD16.3 billion in January. External trade continues to be affected by uncertainty induced by the implementation of GST, particularly for exporters who are still facing delayed GST refunds due to tax filing discrepancies. Similarly, recent decisions by the Reserve Bank of India to ban letters of undertaking and letters of comfort – which importers used to use to obtain overseas financing – could result in higher finance costs and increased working capital constrains.

However, boosted by the forthcoming Foreign Trade Policy, India's exports are expected to reach USD750 billion by 2018-19 according to the Federation of India Export Organisation (FIEO). With the Indian government striking important deals with Japan, Australia and China, overseas trade is likely to increase its contribution to the economic development of the country as well as growth in global markets. Moreover, by implementing Foreign Trade Policy 2014-19, India's share of world trade is expected to double from its present level of 3% by 20205.

FDI reforms in key sectors

The Indian cabinet has given its approval to a number of major amendments to further liberalise and simplify Foreign Direct Investment (FDI) policy. These are designed to make it easier to do business in the country and continue to attract much needed foreign capital to fuel India’s growth6.

Key sector reforms include:

  • The government recently allowed 100% FDI for single-brand retailers via the automatic route and has also relaxed the mandatory 30% domestic sourcing norm in FDI regulations, which has further spurred imports.
  • An amendment allows foreign airlines to invest in Air India, and to permit them to invest up to 49% under the approval route.
  • Foreign investment into an Indian company, engaged only in investing in the capital of other Indian companies or limited liability partnerships and in ‘core investing companies’ has been liberalised and foreign investment of up to 100% under the automatic route has been allowed.
  • The government has eased rules allowing foreign institutional investors or foreign portfolio investors to invest in power exchanges through the primary market as well as restricting investment through the secondary market.
  • Production of a wide range of medical devices can now attract up to 100% FDI via the automatic route.
  • The government has clarified that real estate broking does not amount to real estate business and is, therefore, eligible for 100% FDI under the automatic route.
  • Issue of shares has now been permitted under the automatic route against non-cash consideration such as pre-incorporation expenses, import of machinery, etc. in sectors allowing FDI under the automatic route

The government’s ongoing reform programme and opening up of a range of sectors is a clear indication that it is aiming to ease the investment process in India. This latest liberalisation is the fourth major amendment to FDI policy in the past three years. It is evident that the reform juggernaut is still rolling, and further changes might be on the horizon. Further policy changes will almost certainly make the investment climate more conducive to foreign investors and help India to become one of the largest markets for foreign investments globally5.


  1. Economic Times, India’s GDP growth rises to 7.2% in December quarter, Mar 2018
  2. Focus Economics, India Economic Outlook, Mar 2018 
  3. Trading Economics, India GDP Growth Beats Forecasts in Q4, Feb 2018 
  4. Focus Economics, India: Trade deficit narrows in February; export and import growth decelerates, Mar 2018 
  5. IBEF, Foreign trade policy of India, Jan 2018
  6. Cyril Amarchand Mangaldas Blog, Cabinet Approves Major Changes in FDI Policy, Jan 2018 

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