The outlook for 2018 may be bright, but challenges remain and India must play its cards right.
A quick look at 2017 India’s robust growth trend, coupled with economic and political changes over the previous years, has facilitated Asian growth, making it one of the fastest growing regions in the world (The Diplomat. December 4, 2017. “Asia To Stay World’s Fastest-Growing Region Through 2030”). And by good measure, especially as India has continued to grow faster than any other large economy, except China, while the global landscape was grappling with demand slowdown, subdued manufacturing growth, softening crude prices and geopolitical risks. Amidst global headwinds, macro-economic indicators in India suggested a stable growth trend including high liquidity, healthy capital inflows, strong government revenues, and improving foreign exchange reserves. However, this does not mean the economy has been completely hedged against domestic and international risks particularly as certain structural changes have led to short-term market disruptions. The past year saw certain developments, both international and domestic, that defined India’s growth narrative, for the best and the worst.
Two of the key initiatives that took Indian markets by storm were the implementation of demonetisation, and the goods and services tax (GST) in quick succession, and these may be regarded as partially responsible for market uncertainty and short-term growth pains. Enactment of these reforms was followed by muted economic activity over the last six quarters and the weakness has been characterized by an agriculture slowdown, subdued manufacturing activity, substantial NPAs with the banks, and continuing sluggishness in private investment. The NPAs have grown by a massive 90 per cent in 2016 from 22.8 per cent in 2015 (CEIC Data and Deloitte Analysis).
However, government expenditure saw multiplicity over the past few quarters (Fig 1), thereby preventing a sharper decline in the growth rate. Increased participation and confidence in Indian markets has been reflected through a growth in foreign portfolio investments (FPIs) (Fig 2) as well as a rapid increase in cumulative foreign direct investment (FDI) flows, which have reached record highs. In fact, this sentiment has been reflected in the stock market readings, which have continued to provide optimistic evaluations of corporate earnings growth and rallied over the last year (Nifty50), gaining close to 30 per cent on a yearly basis as of 21 December 2017 (CEIC Data and Deloitte Analysis). There is sufficient evidence to believe that robust capital inflow was fostered by international acknowledgment of India’s strong macro-economic fundamentals and a positive outlook on its stability. The first came in the form of a steep progression in World Bank’s “Doing Business” ranking, which marked a 30 place jump. The second was an upward revision in India’s sovereign credit rating by Moody’s.
A Brighter 2018
Clearly, these events have set the stage for a brighter 2018 and there is enough evidence to suggest that apart from government expenditure, growth is likely to get a boost through increased private consumption, a major part of which might be driven by upswing in rural consumption. Recent months have seen a strong base in two and three wheeler sales growth — a proxy for rural consumption while other government measures like further increases in minimum support prices (MSP), farm loan waiver and an expanding access to financial products and services should support growth. Importantly, investment demand may see a smooth sail as market disruptions ease off and risk appetite improves.
The government has been pressing on the need to continue the momentum on infrastructure building and a key initiative in this regard is the expansive “Bharatmala” project aimed at developing close to 35,000 km of roads at an investment of Rs 5.4 trillion in the next five years which should improve the employment capacity and induce capital investments.
Supplementing this is the bank clean-up process, which has been granted a priority status to improve lending capacity and boost private investment climate. To this effect, the government introduced bank recapitalisation plan to inject Rs 2.11 trillion in the system which is likely to help the banks get over the hangover of the NPLs and restart the muted credit cycle. On the external front, export growth has continued to grow markedly in recent months to 30.5 per cent as of November 2017 and positive predictions for global growth for 2017 and 2018 should help provide above-trend push to export growth.
Even with these developments India remains fairly open to certain risks, key among which are the still prominent banking and agriculture sector concerns. Apart from this, there are concerns that as the government spends to uplift the farm and the banking sector, as well as to boost infrastructure development, it may be at the cost of fiscal consolidation. The news on the external front is also mixed, with uncertainty about both FPI and FDI, as US economy rebounds and US introduces tax reforms to funnel investment back in the country. The rising commodity prices, especially crude, also pose a risk to managing growth and inflationary expectations.
Thus, the real challenge will be in effectively managing any short-term disruptions, whilst making well-planned and effectively administered policy decisions, as the recovery remains incomplete. The right short-term decisions must be taken keeping in mind the composition of fiscal expenditure so as to ensure that short term successes do not have long-term costs.
Ultimately, as much as vigorous public investment in infrastructure remains a factor for propelling overall growth, addressing existing inequalities and institutional obstacles to development, while implementing policy reforms, in an effective and time-bound manner, remain the key.
(Figures and statistics through CEIC data and Deloitte analysis)
About the Authors:
Richa Gupta is Senior Economist and Senior Director, Deloitte India and Umang Aggarwal is Economist, Deloitte India