India business insights

Stronger economic growth in India for Q3

Anuj Chande Anuj Chande

Indian economic growth improved in Q3 2017, although recovery is still slower than expected. Meanwhile, the government’s favourable policy regime and robust business environment has boosted the flow of FDI into the country. 

The latest data on the Indian economy show a 6.3% year-on-year increase in GDP in Q3 2017. This is a distinct improvement on the subdued 5.7% increase registered in the previous quarter, the lowest rate of growth over the last three years. However, recovery continues to be slower than expected, with the lingering effects of demonetisation and the introduction of Goods and Service Tax (GST) (See Table 1).

Table 1. Key economic indicators - India

  Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 *Period for Q4 – 2017 for which data was available
GDP annual growth rate 9.20% 7.90% 7.5% 7.0% 6.1% 5.7% 6.30%   Sep
GDP growth rate 2.30% 1.30% 1.80% 1.60% 1.50% 1.30% 1.40%   Jul
Inflation rate 5.26% 5.67% 5.17% 3.75% 3.54% 2.24% 3.00% 4.23% Oct-Nov
Balance of trade -6,437.2 -6,411.3 -7,925.0 -11,179.7 -9,724.8 -13,350.3 -10,692.7 -13,924.0 Oct-Nov
CPI 126.1 128.7 131.0 131.0 130.5 131.5 134.9 136.9 Oct-Nov
WPI -2.27% -0.70% 1.03% 1.73% 5.26% 2.34% 2.75% 3.76% Oct-Nov
FDI (USD million) 2,912.0 2,314.7 4,742.3 2,501.3 1,540.7 3,176.7 4,365.3 1571.0 Oct
Industrial production 5.77% 7.80% 5.27% 4.40% 2.90% 1.93% 3.20% 2.20% Oct
GDP constant price (INR billion) 30,422.94 29,418.46 29,788.17 30,407.63 32,284.27 31,101.45 31,656.64   Sep

Source: Tradingeconomies.com

Reforms still expected to deliver growth

Recent reform efforts such as GST, measures to digitise the economy and demonetisation to control India’s parallel cash economy temporarily unsettled the economy earlier last year, leading to a decline in business confidence and consumption1.

Despite initial hiccups in implementation, however, in the longer term GST is likely to simplify doing business in the country by easing tax compliance requirements for small enterprises, refunding taxes to exporters more quickly and streamlining GST rates. By lowering the price of capital goods and creating a single market, GST is projected to spur investment demand2.

Private consumption is expected to remain firm due to increases in public pensions and wages, as well as debt write-offs in some States.

Investment has gradually recovered with increasing capacity utilisation. This will be further supported by the government’s plan to recapitalise public banks. It recently announced a plan to infuse INR2.1 trillion (USD32 billion) in state-run lenders over a two-year period.

Other measures such as the new Bankruptcy and Insolvency Code have been taken to clean up banks' balance sheets, giving creditors more control over stressed assets. Together with GST and structural reforms like the Direct Benefit Transfer, this will increase the tax base, promote rationalisation of government schemes, formalise the economy and improve the structure of India’s banking sector. 

Increase in international trade

A recent increase in imports of capital goods has been an encouraging sign for international trade. Large infrastructure projects, such as the initiative to add 35,000 kilometers of new highways over the next five years (at a cost equivalent to about 3.4% of GDP) and new freight rail corridors, will also boost investment. Given India’s high public debt-to-GDP ratio of 69.5%, initiatives to increase social infrastructure, such as health and education, will require more property and income tax revenue to be raised. (See Graph 1)

India's trade deficit widened to USD 14.88 billion in December of 2017 from a USD 10.55 billion a year earlier, however, factors such as improved demand conditions in key markets, the government’s measures on focused markets and focused product schemes, free trade agreements (FTA) with partner countries are likely to boost exports in India (See Graph 2).

 Graph 1. India Imports 2016/17

Graph 2. India Exports 2016/17

 Source: Tradingeconomics.com 

Boost to foreign direct investment

Foreign direct investment (FDI) is a major source of non-debt financial resource for the economic development of India. The government’s favourable policy regime and robust business environment have boosted the flow of FDI into the country.

One of the fundamental reforms undertaken by the government last year was the abolition of the Foreign Investment Promotion Board (which had been responsible for processing FDI proposals for over 25 years) with the intention of expediting FDI approvals.

Other key initiatives taken by the government to provide an investor-friendly climate to foreign players include:3 4 5

  • removal of the recently introduced 70:30 rule to ensure more effective utilisation of Indian infrastructure for manufacturing activities (the rule stipulated that an Indian ‘manufacturer’ would be required to manufacture at least 70% of its products in-house, and source at most 30% from other Indian manufacturers)
  • doing away with the reference to 'single brand' that will allow wholesale/cash & carry traders to undertake retail trading by way of both single brand and multi-brand retail trading through the same entity
  • simplifying the FDI norms for Limited Liability Partnerships
  • clarifying the approving authorities with respect to investment proposals in various sectors
  • capping the level of additional FDI beyond which fresh approval will be required to a cumulative amount of almost USD0.9 billion
  • introducing specific provisions for start-ups such as allowing convertible notes to be issued to foreign investors
  • restricting the ownership and control of an Indian pension fund to resident Indian entities as determined by the Government of India/ Pension Fund Regulatory and Development Authority.

References

  1. Financial Express, Government mulls economic stimulus as GST stings growth, say reports, Sept 2017
  2. Livemint, Indian economy to grow at 7.2% in 2018, says UN report, Dec 2017
  3. India Briefing, India’s FDI Policy for 2017: Startups and Single Brand Retail among Beneficiaries, Sept 2017
  4. IBEF, FOREIGN DIRECT INVESTMENT, Dec 2017
  5. Financial Express, FDI policy 2017: Why Narendra Modi government must unleash FDI reforms, Oct 2017