What is it?
Sporting feats are difficult to imagine from match records and statistics — numbers alone can leave one in the dark about what transpired on the field. The tale of India’s economy in the year gone by is not too dissimilar. One could be fooled into believing little happened if one simply looked at some key parameters at the same time last year and compared them to where we are at now. Bond yields, for instance, on 10-year government securities are virtually the same in December 2018 as they were in December 2017. The GDP grew at 7% for the September-December quarter of 2017, and the latest growth print suggests a rise of 7.1% in the July to September quarter of 2018. Yet, 2018 has been far from benign — in fact, it has been one of the most topsy-turvy roller-coaster rides for the economy in recent years (if one ignores the 2016 demonetisation).
What is the situation now?
Right now, India’s macro economy “appears to be in a sweet spot,” as D.K. Srivastava, chief policy adviser at EY India, puts it. The Organisation for Economic Co-operation and Development’s global growth estimates for 2019 have been revised downward by 20 basis points to 3.5%, but it expects India to be the fastest growing major economy in 2018-19 with a 7.5% surge in GDP. Even the conservative Reserve Bank of India expects growth to be 7.4%. Mr. Srivastava’s optimism stems from the fact that some of the biggest dark clouds that hovered over the economy through the year have now receded or blown away. For starters, after a torrid nine months of freefall, the rupee finally recovered some ground against the U.S. dollar in November. It had gone from a level of around 64 to the dollar at the beginning of the year to as low as 73.7 by October. Consumer Price Inflation, which had been over the 4% comfort zone since late 2017, finally started to taper off after June, slipping to 2.3% by November — the lowest level in 17 months. This happy turn of the tide was largely driven by a drop in crude oil prices that had been buoyant through most of the year, raising concerns about India’s current account deficit and other fiscal indicators going out of whack as it is an oil-import dependent economy.
How did it come about?
While the oil price surge (and cooling off) was dictated by global geopolitical tremors, the Indian government did try to tweak key policy initiatives in a bid to stir up the domestic growth engines. From rationalising the new indirect tax regime (introduced last July) through this year, to plugging loopholes in the insolvency and bankruptcy process aimed at cleaning up the mess in banks as well as corporate India’s balance sheets — some of this has apparently paid off. From a growth rate of just 5.6% in the first quarter of 2017-18 (attributed to firms’ scaling back of inventories ahead of the roll-out of the Goods and Services Tax), gross domestic product climbed steadily for four successive quarters, even crossing the 8% mark to register 8.2% in the April to June quarter. Bank credit growth that had been somnolent in recent times hit a 5-year high (14.6%) in October as investment demand revived. Yet, there was a dark cloud in this silver lining — GDP growth in the July to September quarter slipped to 7.1%, driven mainly by changes in India’s external trade basket owing the surge in crude oil prices.
What lies ahead?
Despite the latest blip, growth in the first half of 2018-19 looks better than the first half of 2017-18, and if external factors like oil prices don’t play spoil sport, there is room for more. The Finance Minister has expressed “comfortable hopes” of meeting the fiscal deficit target for this year, and that should keep other macro indicators in favourable zones. But with the general election months away and an anti-incumbency fear gripping the powers that be (after the State election reverses), the biggest risk to the economy is short-run populism with long, lingering side-effects. More loan waivers, anyone?
