The revival of India's Growth Story

The revival of India's Growth Story

23 Apr 2019

 According to the latest IMF report, India is projected to grow at 7.3 percent in 2019 and 7.5 percent in 2020, on account of a continuation in the investments cycle and increasing consumption levels. China is projected to grow at a rate of 6.3 percent in 2019 and 6.1% in 2020. India remains the fastest growing major economy in the world. In 2018, India's growth rate was 7.1 percent, as against China's 6.6 percent.

We can expect Indian growth to stabilize near 7 percent over the medium term, based on the continued implementation of structural reforms and gradual easing of infrastructure bottlenecks.

The key reason which leads to this growth is the continued implementation of structural and financial sector reforms. The Government is putting efforts to reduce public debt and wants to secure and improve the economy's growth prospects. 

Many crucial measures have been taken to strengthen the financial sector. The government has accelerated resolution of Non-Performing Assets (NPA’s) and has implemented a simplified bankruptcy framework which is seeking to address major issues confronting the economy.

Data for the first three quarters of F.Y. 2018-19 suggests that growth has been broad-based. Industrial growth accelerated to 7.9 percent, making up for a deceleration in services. Meanwhile, agricultural growth was robust at 4 percent. On the demand side, domestic consumption remained the primary growth driver, but gross fixed capital formation and exports both have made growing contributions. Over the last quarter, growth is expected to remain reasonably balanced across the sectors.

A paradigm shift has been seen in the Indian economy since the last decade and it is now on a robust growth trajectory. There is marked visibility as regards stable growth rates, rising foreign exchange reserves as well as flourishing capital markets. 

The Indian economy is expected to witness a stable to lower interest rate cycle. The Reserve Bank of India (RBI) very recently slashed the Repo Rate by 25 bps to 6 percent and kept the stance unchanged to ‘Neutral’. This is the second rate cut in 2019. The RBI has adopted a very sensible approach by cutting the repo rate and keeping the policy stance neutral. Global central banks are already responding with dovish policies, which is a shift from their stance just a few months ago.

According to RBI, the inflation path during 2019-20 is likely to be shaped by several factors. Assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.4 percent in Q4 2018-19, 2.9-3.0 percent in H1: 2019-20 and 3.5-3.8 percent in H2: 2019-20, with risks broadly balanced.

RBI also notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth by spurring private investments, which have otherwise remained sluggish. We can expect the economy to remain robust internally, though many external factors may affect it negatively.

Key areas which are projected to affect the Indian economy this year are as follows-

  • The outcome of the general elections - The ruling NDA lost its three Hindi heartland bastions of Rajasthan, MP, and Chhattisgarh on December 11, and this has suddenly turned the tide for the 2019 elections into an open contest. The outcome of the ongoing general elections are likely to shape India’s prospects going forward.
  • Federal Reserve tone - US may become less aggressive on the rate hike path. This is large because Fed Chairman Mr. Powell sees some genuine worries for US growth from the trade war as well as the escalating fiscal deficit owing to corporate tax cuts.  For the Indian economy, it is positive as it does not put pressure on the RBI to hike the repo rate and maintain the yield spread between the Indian and US benchmarks and avoid portfolio outflows.
  • Trade war - The trade war began with the US imposing punitive tariffs on $250bn of Chinese imports. China retaliated with tariffs on $50bn of imports. As is well-known, trade wars are never good for any economy. From India’s standpoint, the longer the trade war lasts, the greater the risks persist. Although the US is expected to sort out trade issues with China, however, giving the increasing signal for a new trade war with Russia is a reason to worry about.
  • Crude oil - India cannot afford to ignore this mammoth factor ; rising crude price is a reason for worry. A recent study showed that a $10/bbl change in crude oil prices results in a 55bps impact on CAD/GDP and a 30bps impact on inflation. The OPEC and Russia have collaborated to curtail crude supply by 1.2mn bpd (January 2019). However, a lot will depend on the trade war and whether it causes an economic slowdown.
  • RBI policy - The Reserve Bank of India (RBI) slashed the Repo Rate by 25 bps to 6 percent and kept the stance unchanged to ‘Neutral’. This is the second rate cut in 2019. We need to carefully watch RBI’s inflation and rate guidelines post the monsoons this year.

After a volatile 2018, the Indian economy and markets are ready to embark upon a tricky 2019. Growth in India is expected to stabilize over the medium term, based on the continued implementation of structural reforms and easing of infrastructure bottlenecks, but the actual situation of the economy will be known post election results. The ongoing US-China trade war and crude prices are the external factors which are not in control from an Indian perspective. The next RBI policy meeting might take into account these factors before deciding on the next course of action for interest rates, and this will subsequently provide a better direction to the Indian economy.

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