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Indian economy growing at fastest rate since 2016

Anuj Chande Anuj Chande

India is on course to be the world’s fastest-growing major economy this year, with strong domestic consumption shrugging off the impact of global trade wars.

India’s economy grew 8.2% in Q2 2018 compared to 7.7% in the previous three months and ahead of market expectations of a 7.6% rise, propelled by double-digit growth in manufacturing and better farm sector performance.

Private consumption grew 8.6% in the quarter, with rural demand recovering as the effects of demonetisation waned and incomes increased.

Table 1. Key economic indicators - India

Particulars

Q1 2017

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

*Q3-2018 for which data was available

GDP annual growth rate

6.10%

5.60%

6.30%

7.00%

7.70%

8.20%

   

GDP growth rate

1.40%

1.60%

1.90%

1.90%

2.00%

1.90%

   

Inflation rate

3.54%

2.24%

3.00%

4.56%

4.60%

4.79%

3.93%

Jul-Aug

Balance of trade

(9,724.80)

(13,350.26)

(10,691.36)

(14,242.73)

(13,989.23)

(14,980.00)

(17,705.00)

Jul-Aug

CPI

130.50

131.50

134.93

136.97

136.60

137.80

140.10

Jul-Aug

WPI

5.26%

2.34%

2.75%

3.73%

2.83%

4.69%

4.81%

Jul-Aug

FDI (USD million)

1,540.67

3,176.67

4,365.33

1,519.33

2,574.33

3,332.67

1,981.00

Jul

Industrial production

2.90%

1.93%

3.30%

5.87%

6.37%

5.10%

6.60%

Jul

GDP constant prices (INR billion)

32,269.58

31,184.17

31,721.10

32,434.89

34,768.27

33,739.83

   

Source: Tradingeconomies.com

Key indicators show robust growth

India’s main services index rose at its fastest pace in 21 months in July, while manufacturing continued to expand, although at a slower pace. Together these indices pushed the composite index to its highest level since October 2016. A rise in new orders has clearly given Indian businesses confidence to produce more1.

Demand for bank loans in India remained solid going into the second quarter despite rising interest rates1.

Investment grew by 10%, the second consecutive quarter of double-digit growth, spurred mainly by higher government capital expenditure on new infrastructure and an improved business environment.

However, the depreciation of the rupee, non-performing assets, curbs on credit expansion and volatile external financial markets pose challenges2.

Inflationary pressures ease

Data from the Reserve Bank of India showed an uptick in capacity utilisation to above 75%. This usually drives inflationary pressures and indicates improved pricing power, which eventually provides more incentive to invest.

However, annual consumer inflation in India declined to 3.69% in August 2018 from 4.17% in July. This is the lowest inflation rate since October 2017, mainly due to a sharp fall in food costs. 

Wholesale prices rose by 4.53% year-on-year in August 2018, after a 5.09% gain in July. This is the lowest wholesale inflation rate since April, as the cost of fuel increased at a slower pace while food prices declined further. On a month-by-month basis, wholesale prices increased by 0.3%, compared to a 0.4% rise in July3.

Trade deficit widens

India's trade deficit widened sharply to USD17.39 billion in August 2018, from USD12.72 billion in August last year.

Imports surged 25.4% to USD45.24 billion, driven mainly by spending on gold, fuel, machinery and electronic goods.

Exports jumped 19.2% to USD27.84 billion, boosted by sales of chemicals, petroleum products, gems and jewellery, engineering goods and pharmaceuticals.

The trade deficit widened to USD80.35 billion for the period from April to August, compared to USD67.27 billion in the same period last year4.

Structural reforms continue to drive growth

India’s rate of growth is likely to continue to increase with the continued implementation of structural reforms that should raise productivity and incentivise private investment. This should be coupled with improved domestic demand and a steady revival in industrial growth.

Growth should also be bolstered as the economy recovers from the transitory effects of the currency exchange initiative and implementation of the national Goods and Services Tax (GST), supported by strong private consumption growth. India’s progress on structural reforms in the recent past, including concluding the implementation of GST will help to reduce internal barriers to trade, increase efficiency and improve tax compliance.

The impact of rising oil prices should be offset by robust domestic demand and an increase in exports. Domestic demand should continue to drive growth for the rest of the fiscal year as rural consumption benefits from favourable weather, higher procurement prices for crops and measures taken to bolster farmers’ incomes. 

Challenges to growth

India’s high public debt and its recent failure to achieve its budget deficit target, along with calls for continued fiscal consolidation in the medium term to further strengthen fiscal credibility, remain challenges for the government.

Moreover, India still needs to ease labour market rigidities, reduce infrastructure bottlenecks and improve educational outcomes to remove constraints on job creation and ensure that the demographic dividend is not wasted.

The risk of fiscal slippage in the run-up to next year’s general elections, along with increasing global trade tensions and higher oil prices, also cloud the outlook for the economy5.

FDI outlook

The Indian government’s favourable policy regime and robust business environment have ensured that foreign capital keeps flowing into the country.

According to the Department of Industrial Policy and Promotion, total FDI investments in India from April to June 2018 stood at USD12.75 billion. Changes in FDI policy made by the government in 2017 demonstrate its efforts to remove multiple layers of bureaucracy and process proposals for FDI under the government approval route in a more streamlined, positive and expeditious manner6.

The government has eased 87 FDI rules across 21 sectors in the last three years, opening up traditionally conservative sectors like rail infrastructure and defence. It is also considering 100% FDI in insurance intermediaries in India to give a boost to the sector and attract more funds. Similarly, no government approval will be required in the future for up to 100% FDI in real estate broking services6.

References

  1. India’s economic indicators show animal spirits very much alive, Livemint, August 2018
  2. ADB retains India growth forecast for FY18 at 7.3%, Economic Times, September 2018
  3. India Wholesale Price Index Change, Trading Economics, September 2018
  4. August trade deficit narrows to $17.39 billion from $18.02 billion in July, Economic Times, September 2018
  5. India Economic Outlook, Focus Economics, Sept 2018
  6. Foreign Direct Investment, IBEF, Sept 2018

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