Is Indian Economy Poised for Rosy Days Ahead?

Dr BK Mukhopadhyay

A noted management economist and an international commentator on business and economic affairs. He may be reached at m.bibhas@gmail.com

The global economy is experiencing a broad-based cyclical upturn, which is expected to be sustained over the next couple of years, although downside risks persist. Global growth is projected to edge up to 3.1 per cent in 2018, as growth in advanced economies is projected to slow while growth in emerging economies is expected to accelerate. So far India is concerned, heat is on – the current trends indicate a positive view. Let us first have a look at what others are saying.

After conceding its position as the fastest growing major economy to China for a year in 2017, India is likely to reclaim the position in 2018, with growth expected to accelerate to 7.3 per cent in the year, according to the World Bank’s Global Economic Prospects report released a few weeks back. The report projected China’s economic growth to slow to 6.4 per cent in 2018 from 6.8 per cent in 2017. The World Bank also revised India’s growth estimate for 2017 to 6.7 per cent from 7 per cent projected in October 2017, blaming short-term disruptions caused by the newly introduced goods and services tax (GST) and a softer-than-envisioned recovery in private investment. India has been projected to grow at 7.3 per cent projected for 2018.

Moody’s Investors Service in a latest report assessed that India and China remain the fastest growth economies in the Asia-Pacific region. Fitch projected India’s economy to revive to grow at 7.3 per cent in 2018-19 and 7.5 per cent in 2019-20 from 6.6 per cent a year ago as a temporary drag will fade from the withdrawal of large-denomination bank notes in November 2016 and the introduction of a Goods and Services Tax (GST) in July 2017.

However, Fitch Ratings did not upgrade India’s sovereign rating, reaffirming its lowest investment grade rating at BBB, with a stable outlook. It blamed weak fiscal finances and some lagging structural factors, including governance standards and a still difficult but improving, business environment for its rating action, although it noted India’s strong medium-term growth outlook and favourable external balance.

Incidentally, it may be mentioned here that last year, while Moody’s Investors Service raised India’s sovereign rating from the lowest investment grade of Baa3 to Baa2, and changed the outlook to stable from positive, Standard and Poor’s kept its India rating unchanged at the lowest investment grade of BBB, with a stable outlook. Accordingly, weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings. General government debt amounted to 69 per cent of GDP in FY18, while fiscal slippage of 0.3 percent of GDP in both FY18 and FY19 relative to the government’s own budget targets of last year, and implies a general government deficit of 7.1 per cent of GDP.

Side by side, the rating agency said the Central government’s aim to gradually reduce its own fiscal deficit from 3.5 per cent in FY18 to 3.0 per cent of GDP by March 2021 is “well beyond its current electoral term”. Accordingly, “the government has reasserted its longer-term aim of gradual fiscal consolidation with an amendment of the FRBM Act to set a ceiling for central government debt at 40 per cent of GDP and general government debt at 60 per cent of GDP, to be reached by March 2025. This is a positive step towards a more prudent fiscal framework, if eventually adhered to”.

Fitch praised the Reserve Bank of India (RBI) for building a solid monetary policy record, as consumer price inflation has been well within the target range of 4 per cent to +/- 2% since the inception of the Monetary Policy Committee in October 2016. However, it expects RBI to start raising its policy rates next year from 6 per cent currently as growth gains further traction.

It has keenly observed: “Monetary tightening could be brought forward if recent government policies push up inflation expectations, including the decision to increase minimum support prices for agricultural goods to 1.5 times the cost of production and increased customs duties on certain products, including electronics, textiles and auto parts.”

The rating agency said India’s relatively strong external buffers and the comparatively closed nature of its economy make the country less vulnerable to external shocks as compared to many of its peers. However, it cautioned that falling net FDI inflows at $23.7 billion in the first three quarters of FY18 from $30.6 billion a year earlier are “insufficient” to cover a widening current account deficit, unlike in many of India’s peers.

Fitch said government’s efforts to liberalize the foreign investment regime such as allowing 100 per cent FDI in single-brand retail through the automatic route may facilitate a recovery in FDI, if combined with further investment climate reforms.

Obviously the external sector calls for greater attention. India’s trade deficit slightly widened to $13.72 billion in April from $13.25 billion a year ago. Merchandise exports for April rose 5.2 per cent from a year ago to $25.9 billion. Goods imports last month were $39.6 billion, a gain of 4.6 per cent from a year ago, and data from the commerce and industry ministry showed. The trade deficit for 2017/18 fiscal year ending in March grew to $156.8 billion from $105.72 billion in the previous year, mainly driven by a rising oil import bill — a growing concern for the central bank.

Fitch rightly opined that India can expect a rating upgrade if it reduces general government debt over the medium term to a level closer to that of rated peers at 41 per cent of GDP and maintains higher sustained investment and growth rates without the creation of macro imbalances, such as from successful implementation of structural reforms. On the other hand, if public debt burden increases, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the balance sheets of public sector banks as well as loose macroeconomic policy settings that cause a return of persistently high inflation and widening current account deficits, it could trigger a rating downgrade. GST is an important reform, however, and is likely to support growth in the medium term once teething issues dissipate.

The World Bank has rightly cautioned: “…growth in potential output is flagging, languishing below its longer-term and pre-crisis average both globally and among emerging market and developing economies. The forces depressing potential output growth will continue unless countered by structural policies…..A gradual moderation in growth in China and temporary slowdown in India will be balanced by robust growth trends in other Asian economies.”

The projection made by Ayhan Kose, director, Development Prospects Group, World Bank, is worth noting on this score: “In all likelihood, India is going to register higher growth rate than other major emerging market economies in the next decade. So, I wouldn’t focus on the short-term numbers. I would look at the big picture for India and big picture is telling us that it has enormous potential.”

Then why not to expect a rosy picture ahead? Containing the fiscal deficit, strong private consumption and services, corporate sector adjusting steadily to the GST, rise in infrastructure spending, improved public services and internet connectivity; support credit to the private sector, better attention to the farm sector, lifting investment, and tackling the NPA front, among others, could definitely extend support to economic activity.