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Present State of Indian Economy- an Overview

Context:

The recent growth estimates released by Central Statistics Office (CSO) suggests that the Indian economy grew by 7.7% in Q4 FY 2018 (2017-18)

Trends in GDP growth rate:

Real GDP growth rate

  • Real GDP growth which was 7.6% in Q2 FY17 decelerated sharply to 6.8% and 6.1% in Q3 and Q4 of FY17
  • The growth accelerated to 7% in Q3 of FY18 and 7.7% in Q4

Nominal GDP growth rate

  • Because of high inflation rates, India’s nominal GDP have always been high
  • However, due to moderation of inflation rates, nominal GDP growth rate declined from 10.7% in Q4 of FY17 to 8.3% and 9.5% in Q1 and Q2 of FY18. In Q4FY18, it stands at 10.9%
  • The trend in GDP growth clearly indicates a ‘V’ –shaped recovery pattern

Reasons for decline in GDP growth after Q2FY17: ( Economists like D K Srivastava)

  1. Demonetization and its implications
  2. Transitional issues of GST
  • Lack of clarity over many GST provisions
  • Frequent changes in tariffs
  • Decline in manufacturing activity

Sectoral Trends:

  • Manufacturing – Gross value Added (GVA) of manufacturing declined to 6.1% in Q4 FY17. It has expanded by 9.1% in Q4 FY18.
  • Construction grew by 11.5% in Q4 FY18.
  • Trade Service – Trade, hotels, transport and communication had declined to 5.5% in Q4 FY17. In Q4FY18 it grew to 6.8%.
  • Financial services and real estate which stagnated in Q4 FY17 grew by 5% in Q4 FY18.

Factors contributed to the sharp recovery of Indian economy:

The recovery has been mainly based on domestic factors. This can be validated from the fact that contribution of net export growth to GDP has been zero or negative since Q3 FY 2016-17

Demand side factors

  • Increased Govt consumption
  • Increase in investment demand (Growth in gross capital formation has been high- 14.4% in Q4FY18)
    • Gross fixed capital formation – Measure net increase in fixed capital measure private and public sector investment spent on formation of fixed capital such as construction of roads, railway, commercial buildings, etc.

Note: –land purchases & depreciation not included.

Supply side factors

  1. Inflation targeting and Monetary Policy Framework
  • MPF is an agreement between government and RBI to set consumer inflation target in a band of 4 +/- 2
  • In 2018, government retained inflation target at 4%
  • The policy ensures stability in the economy and thus help boost economic growth
  1. Govt policy initiatives
  • Make in India
  • Start Up India
  • UDAY -Ujwal DISCOM Assurance Yojna
  • Real Estate (Regulation and Development) Act
  1. Better targeting of subsidies
  • Direct Benefit Transfer
  • Aadhaar linkages
  • Socio-economic Caste Census
  1. Expansion of infrastructure viz. rail/ road projects
  • Dedicated freight corridors
  1. Goods and Service Tax (GST)
  2. Demonetization

Concerns:

  1. The GDP Growth rate is still a concern
  • These are only quarterly GDP growth estimates. Though GDP growth was at 7.7% in Q4 FY18, it is to be noted that FY18 has closed with the lowest real GDP growth in four years (6.7%).
  • Thus it is too early to conclude that the Indian economy has revived
  1. The revival of the economy is primarily led by growth rates of public administration, defence, construction and better than expected performance in the agriculture sector.
  • Though the construction sector has genuinely recovered, the growth in public administration and defence indicates a changing pattern in government expenditure.
  • Both growth in agriculture and public administration is vulnerable to shocks and pressures. Thus sustainability of this growth is a serious concern.
  1. Agrarian and rural distress is a major concern
  • Growth in nominal GDP in agriculture (4.9%) is the lowest sin Q4 FY2012-13- The growth is lower than even that in drought years (2014 and 2015)
  • Collapse in agricultural prices as indicated by the GDP inflator in agriculture at 0.42%
  1. Decline in domestic demand- Demand deflation
  • Decline in domestic demand especially in rural areas as indicated by GDP deflators and data on rural wages
  • The rural real wages have been very poor until January 2018

GDP deflator It is the ratio of nominal GDP to real GDP

  1. Low Export- GDP Ratio:
  • Merchandise exports as a proportion of gross domestic product for 2017-18 is the lowest since 2003-04 11.65% in 2017-18
  • Export value declined rapidly- $315 billion in 2013-14 to $275 billion in 2016-17. However it has recently risen to $303 billion in 2017-18.

Export – GDP ratio – Export expressed as percentage of GDP

  1. Low Investment-GDP ratio:
  • Himanshu, Professor of Economics, Jawaharlal Nehru University, questions the V shaped recovery of Indian economy in the backdrop a poor investment- GDP ratio.
  • It was 38% in 2007-08, declined to 31% in 2013-14 and further declined to 29% at present.

Investment – GDP Ratio Investment as % of GDP. Obtained by calculating gross capital formation as % of GDP

  1. Poor capacity utilization of industries:
  • Capacity utilization of industries is low- 70%
  1. External Factors:
  • Rising global crude oil prices after US sanctions on Iran and crisis in Venezuela- This may adversely affect trade and current account deficits, inflation, exchange rate and fiscal deficit
  • The potential US-China trade war which has raised uncertainties in the international market
  • Rising interest rates in USA reducing the prospects of funds flow in emerging economies like India
  1. Increasing Inflation
  • Inflation which has remained low in recent years has been recently rising
  • CPI based inflation increased to 4.6% in April 2018 due to rising prices of diesel and petrol.
  • The RBI has recently increased the Repo rate (6.25%)after 4 Years

Repo rate: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by to control inflation.

  1. Fiscal consolidation
  • Fiscal consolidation of Union government has been counterbalanced by State balance sheets
  • Subsidy burden of government has risen and fiscal deficit is a major concern
  • Fiscal deficit-GDP ratio- 3.5% in 2017-18. This has exceeded the FRMB target of 3%

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