Article

Indian economy growing at fastest rate in two years

Anuj Chande Anuj Chande

The Indian economy grew faster than forecast at 7.7% year-on-year in Q1 2018, above the 7% growth seen in the previous quarter. This is the highest growth rate since Q2 2016 and confirms India’s status as the world’s fastest growing major economy.

A steady increase in GDP growth rate over the last four quarters indicates that the Indian government’s structural reform measures are bringing rich dividends.

Measures Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 *Q2 2018 for which data was available
GDP annual growth rate 6.10% 5.60% 6.30% 7.00% 7.70% NA  
GDP growth rate 1.40% 1.60% 1.90% 1.80% 1.90% NA  
Inflation rate 3.54% 2.24% 3.00% 4.56% 4.60% 4.73% Apr-May
Balance of trade (USD million) (9,724) (13,350) (10,691) (14,243) (13,989) (14,170) Apr-May
CPI 130.50 131.50 134.93 136.97 136.60 137.45 Apr-May
WPI 5.26% 2.34% 2.75% 3.73% 2.83% 3.81% Apr-May
FDI (USD million 1540.67 3176.67 4365.33 1519.33 2574.33 4859.00 Apr
Industrial production 2.90% 1.93% 3.30% 5.87% 6.37% 4.90% Apr
GDP at constant prices (INR billion) 32269.58 31184.17 31721.10 32434.89 34768.27 NA  

Source: Tradingeconomies.com

India retained fastest growing major economy status in Q1 2018 from China, which recorded a growth rate of 6.8%.

Growth was boosted by strong performance in construction, manufacturing and public services, indicating a persistent revival trend and bringing cheer to the government ahead of next year’s general election.

The government has been vigilant in bedding-in its major reforms in the tax and regulatory arena, to provide a further boost to the economy and make it easier to do business. For example, by revising Goods and Services Tax (GST) rates for various categories.

It has entrusted a committee to amend the Insolvency and Bankruptcy Code (IBC) and remove a number of ambiguities to give resolution professionals greater flexibility to raise interim finance. The government has also reduced the threshold for Committee of Creditors (CoC) votes from the current 75% to 66%, to extend the resolution period.

Import duties on certain commodities have also been raised to encourage the ‘Make in India’ initiative part of a concerted effort to improve the economy.

Construction sector leads the way

Growth in the agriculture, manufacturing and construction sectors stood at 4.5%, 9.1% and 11.5%, respectively, in Q1 2018, with the latter contrasting sharply to 3.9% negative growth in the same period last year. 

International trade, hotels, transportation, communication and services sectors grew at an average 8% during the year to March 2018 compared with 7.2% growth in the previous year.

The pickup in credit off-take helped financial services grow by 6.6%, above the 6% growth seen in the previous year. Public administration, defence and other services grew at 10% year-on-year, marginally lower than the 10.7% growth in the previous year1.

Inflationary pressures

India’s retail inflation jumped to a four-month high during Q2 2018 (till the month of May’18). This was primarily driven by a surge in global oil prices, which hit a three and a half year high in May 2018 due to fears about supply constraints, partly due to the US’s decision to withdraw from the 2015 Iran Nuclear Agreement.

A weakening Indian Rupee, which has shed 5.7% against the US dollar in 2018, is also a cause for concern. A dip in GST collections continued, attributed to corrections in the rates applied to different goods and services, glitches in stabilising the GST online return filing mechanism and delays in refunds relating to exports.

The Reserve Bank of India responded in June by raising the repo rate for the first time since 2014 by 0.25 basis points to 6.25% to keep a check on inflation.

On a more positive note, there has been a lot of focus on infrastructure development. The effect of the Union Budget 2018 has started to show, with USD92 billion allocated to new infrastructure.

Going forward, Consumer Price Index (CPI) inflation is expected to pick up to 4.6% on average for the year to March 2019, above the forecast of 4% for the year to March 2018, owing to rising consumption demand and higher global crude oil prices.

The risk of further inflation arises from three factors: fiscal actions such as higher Minimum Support Prices; higher pension outgoings to the Seventh Pay Commission; and firmer global oil and metal prices that will compel manufacturers to raise prices, given improving domestic demand conditions.

Trade deficit widens

India’s current account deficit (CAD) is expected to expand from 0.7% of GDP in the year to March 2017, to 1.7% of GDP in the year to March 2018, and further to 1.9% of GDP in the next year, owing to import growth exceeding export growth.

A higher CAD will exert pressure on the Indian Rupee as well. Despite higher CAD in the first half of the 2017/18 fiscal year, the Indian Rupee appreciated, owing to a surge in foreign capital inflows. However, going forward, capital inflows are at risk from a tightening of global liquidity and other adverse global financial developments.

FDI at its lowest in five years

 According to the latest data released by the Department of Industrial Policy and Promotion (DIPP), foreign direct investment (FDI) in 2017/18 stood at USD44.85 billion, the lowest level recorded in the last five years. This is widely attributed to the uncertainty and complexity of India’s FDI policy. To check this trend, the government has put in place a detailed protocol for clearing all FDI proposals as part of an exercise to speed up approvals and bring about greater transparency2.

Although over 95% of FDI proposals are now approved via the automatic route, those related to sectors such as defence, aviation, telecoms and information and broadcasting need clearance from the ministries concerned after the government decided to wind up the Foreign Investment Promotion Board (FIPB) last year3.

The Reserve Bank of India put in place the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 on 20 March 2018, making cross border mergers (CBM) a reality. Deemed approval status for CBMs will materially curtail the process and time required to complete a merger and is a welcome move.

Reference to demerger transactions, which formed part of the draft notification, have been removed from the final CBM Regulations. This brings them into line with the provisions of the Companies Act, 2013. Outbound mergers have now made their mark for the first time in the history of the Indian legislation. However, the issue of specific tax neutrality of such mergers remain a concern.         

References

  1. Economic Times, India's GDP grows 7.7% in Q4, retains fastest growing economy tag, June 2018
  2. Business Today, FDI inflow growth rate dips to 5-year low in FY18, July 2018 
  3. Economic Times, Government puts protocol in place to speed up FDI, June 2018