India’s economic growth slowed in Q2 2017, with a significant weakening in its balance of trade. However, government reforms are expected to boost both domestic and foreign direct investment (FDI) to help get the economy back on track.
GDP growth fell to 5.7% in the second quarter of 2017, down from 6.1% in Q1 (see Table 1). The Q2 growth rate was the slowest in three years, largely as a result of the disruption and uncertainty surrounding the roll-out of the Goods and Services Tax (GST). This was coupled with the fact that the Indian economy was still coping with the lingering effects of demonetisation1.
Table 1. Key economic indicators - India
|Q1 2016||Q2 2016||Q3 2016||Q4 2016||Q1 2017||Q2 2017||Q3 2017*||*Period for Q3-2017 for which data was available|
|GDP annual growth rate||9.20%||7.90%||7.5%||7.0%||6.1%||5.7%||June|
|GDP Growth rate||2.30%||1.30%||1.80%||1.60%||1.50%||1.50%||Apr|
|Balance of trade- USD Mn||-6437.2||-6411.3||-7925.0||-11179.7||-9724.8||-13350.3||-11546.9||Jul-Aug|
|FDI- USD Mn||2912.0||2314.7||4742.3||2501.3||1540.7||3176.7||3409.0||Jul|
|GDP Constant Price INR Bn||30422.94||29418.46||29788.17||30407.63||32284.27||31101.45||Jun|
|* Q3-2017 does not include information pertaining to the entire period between Jul-17 to Sept-17.
Source: Trading economics2
A deterioration in overseas trade, together with weak domestic demand, contributed to the slowdown in GDP growth. Notably, exports slowed significantly, falling 5% in Q2 compared to growth of 13% in Q1. Meanwhile, imports grew 7% in Q2, up from 4% growth in Q1, weakening the balance of trade significantly.
This rise in imports was partially driven by increasing demand for gold, as consumers front-loaded purchases before the introduction of the GST, along with increased sales of petroleum, crude and oil products, followed by electronic goods2.
However, the balance of trade position is showing signs of recovery in Q3 2017 due to increased sales of engineering goods, petroleum products, organic and inorganic chemicals, and drugs and pharmaceuticals.
Investment has been a weak spot in India’s economy, primarily due to the number of debt-burdened firms and a banking sector reeling under the weight of non-performing assets (NPAs). Having said that, implementation of the Insolvency and Bankruptcy Code is expected to provide banks and companies with opportunities to resolve this conundrum.
On the demand side, growth in investment in fixed assets such as technology remained sluggish in Q2, coming in at 1.6% (down 2.1% on a year-on-year basis), while private consumption increased by 6.7% in Q2, below Q1’s 7.3% rise. India's growth momentum will only get stronger as the private investment cycle starts to revive gradually, along with an improvement in private consumption.
Overall, we can expect the economic impact of demonetisation and GST to reduce notably over the coming months, leading to a gradual economic improvement.
The World Bank expects private investments in India to grow by 8.8% in FY 2018/19, overtaking private consumption growth of 7.4% and driving growth in GDP3.
Reforms set to encourage FDI
India is likely to see increased FDI inflows on the back of reforms such as GST aimed at lowering the cost and complexity of doing business in the country. This is along with a simplified and clarified bankruptcy code which is expected to improve the health of the country’s burdened banking sector in the long-run.
According to the Department of Industrial Policy and Promotion (DIPP), total FDI investments in India between April and June 2017 stood at US$14.55 billion, demonstrating that the government's efforts to make it easier to do business and relaxation in FDI norms are yielding results4.
Recent policy measures and key government initiatives to boost FDI include:
- the Department of Industrial Policy and Promotion (DIPP) approved nine FDIs worth US$780 million, including Amazon India's proposed US$546 million investment.
- the government is in talks with stakeholders to further ease FDI in defence under the automatic route to 51% from the current 49%, in order to boost the Make in India initiative and generate employment.
- the Union Cabinet has approved raising of bonds worth US$366 million by the Indian Renewable Energy Development Agency (IREDA), which will be used in various renewable energy projects in FY 2017/18.
- the 100% FDI limit (49% under the automatic route; more than 49% under the government route) for the defence sector will be applied to manufacturing of small arms and ammunitions covered under the Arms Act 1959.
- the foreign equity cap on activities of non-scheduled air transport services and ground handling services is increased from 74% to 100% under the automatic route.
- the government has issued guidelines for foreign investment in the e-commerce sector, with 100% FDI permitted under the automatic route.
- the requirement for ‘controlled conditions’ for FDI in animal husbandry (including breeding of dogs), pisciculture, aquaculture and apiculture has been waived.