Article

Mixed outlook for world’s fastest growing economy

Anuj Chande Anuj Chande

Despite various challenges and a slower growth rate in Q3 2018, India has remained ahead of China and the rest of the world in terms of economic growth.

With an average growth rate of 7.2%, India continued to rank as the world's fastest growing economy in 2018. While the economy experienced a number of ups and downs, it managed to withstand a sudden rise in oil prices, a strengthening US dollar and slowing growth in the wake of the US-China trade war1.

India has continued to improve its ranking in the World Bank's 'ease of doing business' report –jumping more than 20 places to 77th position1. The government’s structural reforms in areas such as insolvency, taxation and monetary policy framework appear to have contributed to the favourable investment climate.

Although it is still the world’s fastest growing economy, in Q3 of 2018 the Indian economy experienced its lowest growth rate since Q4 2017 (it advanced 7.1% year-on-year, compared to 8.2% in the previous period)2. This was mainly due to a slowdown in consumer spending amid high oil prices and a weaker Indian Rupee. Inventories, financial services, manufacturing and the farm sector also saw stunted growth3.

Particulars

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Q4 2018

*Q4-2018 for which data was available

GDP annual growth rate

5.60%

6.30%

7.00%

7.70%

8.20%

7.10%

   

GDP Growth rate

1.60%

1.90%

1.90%

2.00%

1.90%

     

Inflation rate

2.24%

3.00%

4.56%

4.60%

4.79%

3.85%

2.85%

Oct-Nov

Balance of trade

(13,350.26)

(10,691.36)

(14,242.73)

(13,989.23)

(14,980.00)

(16,463.33)

(16,900.00)

Oct-Nov

CPI

131.50

134.93

136.97

136.60

137.80

140.13

140.75

Oct-Nov

WPI

2.34%

2.75%

3.73%

2.83%

4.69%

4.92%

4.96%

Oct-Nov

FDI (USD million)

3176.67

4365.33

1519.33

2574.33

3332.67

1939.50

 

Jul-Aug

Industrial production

1.93%

3.30%

5.87%

6.57%

5.10%

5.23%

8.10%

Oct

GDP constant prices (INR billion)

31184.17

31721.10

32434.89

34768.27

33739.83

33976.2

 

Jul-Aug

Source: Tradingeconomies.com

Key factors behind growth

Both foreign and domestic investor confidence has increased steadily, driven by an increase in capacity utilisation, improvements in public sector performance and e-governance structure, as well as large infrastructure programmes. Structural reforms such as the new Insolvency and Bankruptcy Code (IBC) and public bank recapitalisation have also played a role in supporting growth.

In addition, the enhanced monetary policy framework and easing of finance conditions have delivered a strong performance on the SME financing indicator, where India currently ranks 16th.4

Exports have rebounded due to a weaker Indian rupee and improved implementation of the Goods and Services Tax (GST). Private consumption remains strong, particularly in rural areas, supported by steady government spending on infrastructure5.

Inflation remains in check

Consumer price inflation remains within the target band, hovering near 4%4. A number of one-off factors have contributed to this, such as a good monsoon, lower taxes on oil products and the government requesting public sector oil marketing companies to lower their margins. However, pressures on inflation are rising due to the depreciation of the rupee and recent increases in public spending.

Despite pressure on emerging market economies, India was able to improve its macroeconomic stability score from 88.7 to 89.84.

Measures to stimulate FDI

Foreign direct investment (FDI) growth continues to slow, at a rate of only 1.24% in the 2018 fiscal year6.

To counter this, the government has put additional measures in place to stimulate growth. For example, it has simplified the approval mechanism for FDI proposals and introduced a mandated time limit for processing proposals. To further encourage FDI the government is:

  • considering 100% FDI in insurance intermediaries to boost the sector
  • allowing foreign airlines to invest up to 49% in Air India
  • removing the required government approval for FDI in real estate broking services.

Trade deficit widens further

India’s current account deficit continues to widen, due to higher oil prices and India’s growth differential with other economies.

Financing the deficit is becoming more challenging, particularly given the sluggish FDI flows and reductions in portfolio capital. To limit the current account deficit, the government has hiked import duties and removed some of the constraints on firms’ external borrowing5.

Outlook for 2019

Global economic conditions are predicted to tighten in 2019. The main external risks are likely to come from increasing oil prices and the potential knock-on effects of turbulence in other emerging economies. On the other hand, India’s exports could benefit from the hike in US tariffs on Chinese imports. Continued improvements to GST administration and the depreciation of the rupee should also continue to boost exports.

On the domestic front, India faces a general election – rising political uncertainty could reduce growth in the short term. Even so, economic activity is projected to slow only marginally.

Pressure on inflation may be reinforced by the government’s plan to raise Minimum Support Prices for agricultural crops. However, the Reserve Bank’s credibility in targeting inflation, and the projected marginal increases in policy rates, should help keep inflation in check.

Corporate investment is likely to remain healthy, supported by recent structural reforms and better infrastructure7.

For more information please contact Anuj Chande.

References

  1. India remains fastest growing economy ahead of China despite ups, downs, IBEF, January 2019 
  2. Foreign Direct Investment (FDI), IBEF, October 2018
  3. India GDP Annual Growth Rate, Trading Economics, November 2018 
  4. How to future-proof India’s economy, World Economic Forum, November 2018
  5. OECD Economic Outlook, Volume 2018 Issue, OECD, November 2018 
  6. FDI into India up from $45 billion to $61 billion in 4 years, but rate of growth is slowing down, Business Today, December 2018
  7. IMF retains India FY19 growth outlook at 7.3%, Economic Times, October 2018
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