India’s GDP to slow down in FY 2017-18 to 6.5% Rating agencies and Economists predict a rally in FY 2018-19

The Central Statistical Organisation (CSO) has predicted  India’s GDP growth aka economic progress to slow down to 6.5% in the Financial Year ending March 2018. This attracts global attention because most investors of the world have turned to India as a favourite destination against the backdrop of a grinding slow down and overheating of the Chinese economy badly hit by global recession.

Most economists are quick to point out demonetisation, which crushed the cash driven economy (India’s cash driven economy is as high as 96%), and the GST rollout as the main factors that put road blocks on an otherwise growing economy that showed promise as soon as Prime Minister Narendra Modi took the reins of power in 2014 in a rising anti-corruption tide of public opinion.

The CSO figures come as a shock to the Modi administration as it’s the worst GDP rate prediction since 2014. The forecast also comes ahead of the 5th and probably the last budget of Finance Minister Arun Jaitley for FY 2018-19 as the nation goes to polls in May 2019. Jaitley does not have much choice to tinker with the economy or with policy measures given the pre-election scenario when governments usually announce a slew of measures to woo the public. Jaitley does not have much choice except to correct some mistakes that might have inadvertently hit the economy and the people through tough measures such as demonetisation sucking out 21 billion high denomination notes (Rs 1,000 and Rs 500 replaced by new Rs 2000 and Rs 500 notes)  from circulation and the GST left the industry and small trade confused and in panic over the procedural problems of implementation, even though both the well intentioned measures were aimed at harmonising taxation rates nation-wide and cut funding to terrorists.

What we infer is that both tough measures were either implemented in a rush before working out the plan to the last detail or just dealt collateral damage to the economy and the people through lack of preparedness on the part of the government machinery in its execution.

Whatever it may be, the consequent result is that the GDP has slowed down considerably. How does the government take remedial measures in the budget to restore investor confidence in India? Government has to literally come out with dramatic measures to revive the economy while at the same time, remembering that it’s a budget that comes as the last one and gives any leeway to the government before the 2019 elections.

Here are the depressing factors to tackle with: In FY 2017-18 the manufacturing sector is predicted to slow down to 4.6% from a high of 7.9% in FY 2016-17, The agriculture sector, a major employment generating sector is anticipated to grow only at 2.1% for the year against 4.9% in FY 2016-17.

But economists and rating agencies, domestic and overseas, are not that pessimistic about the CSO predictions. They have made their own calculations and opine that the economy would kick back into shape.

The World Bank and IMF had forecasted a slow down of India’s growth, using their own algorithms last year the WB subsequently, in a report, moved India up 30 notches in its table of favourite investment destinations. So the world is still optimistic that growth will kick in.

HSBC, a leading foreign bank operating in India channelling foreign investments and domestic deposits, is not rattled by the CSO estimates. “India’s growth rate is expected to accelerate over the coming years and is likely to improve further to 7.6% by 2019-20 as key sectors would revive from disruptions related to the implementation of GST and demonetisation, says the intelligence report of HSBC.

India’s GDP growth rate is expected to accelerate to 7.0% in 2018-19 from 6.5% in this fiscal year, shaking off the disruptions from demonetisation and introduction of the Goods and Services Tax (GST), the global financial services major is quoted in the media as saying.

HSBC estimated India’s growth at around 6.5% in 2017-18, 7.0% in 2018-19 and 7.6%  in 2019-20, respectively. The report further said the recovery in India’s GDP growth will likely be relatively gradual, preventing price pressures from rebounding and allowing the Reserve Bank of India to keep rates on hold for the time being.

As impact of transient factors wane, inflation will settle down to RBI’s 4% target. “We expect inflation to average 3.4% over FY18 (ending the year in March at 4.3%),” it said. Also stressing that RBI will keep the repo rate on hold, as the rate-cutting cycle of the central bank looks set to have ended, with most inflation risks tilted to the upside.”

The RBI in its fifth bi-monthly review of FY 2017-18 kept repo rate unchanged at 6% and reverse repo at 5.75% while raising the inflation forecast for the remainder of 2017-18 to 4.3-4.7%. Repo rates are at which the federal bank lends to commercial banks especially the state owned ones.

“India has the highest potential GDP growth rate of 6.7% per annum over the next five years among the 10 major economies studied, said FITCH, a leading rating agency in its report on Medium-Term Growth Potential in Emerging Economies.

FITCH anticipates a real push to GDP growth from improvement in total factor productivity (TFP), coming from structural reforms such as GST. “The pick-up in labour productivity in recent years has been almost entirely due to capital deepening, Fitch says claiming that is about to change.

“Potential GDP should continue to be bolstered by a fast-rising working age population (whose growth is set to slow only marginally) and good labour productivity gains. We expect a sharp pick up in TFP growth, as the reforms carried out by the government (such as the implementation of the goods and services tax) should start to bear fruit, spurring more efficiency in the productive process.’ FITCH says in its report.

Another rating agency, CRISIL attributes the continuing slowdown to the impacts of the demonetisation, GST implementation and weakness in agriculture. CRISIL maintains its FY19 growth estimate at 7.6% on the low base. “The pace of economic growth has slowed down this fiscal year, which is attributable mostly to the lingering impact of the demonetisation, transitory disruptions caused by the implementation of the goods and services tax (GST), and weak agricultural growth,” CRISIL said in a research paper which has been quoted widely in the media.

Despite the CSO’s advanced estimates of growth for FY18, the agency steadfastly holds onto its FY19 healthy growth estimate of 7.6%, primarily on the low base of FY18.

“Given the low base and the expected waning of the GST impacts going ahead, we retain our forecast of 7.6 per cent real GDP growth in fiscal 2019, with private consumption leading the recovery,” it said. Private consumption will grow 6.3% in FY18, over a high base of an 8.7% growth in FY17, and will remain the biggest contributor to GDP at 55.7%, the report said.

In FY19 as well, growth will continue to be consumption-led as inflation will be under control and interest rates are expected to be soft, it said, adding a rise in government employees’ salaries with the implementation of the seventh pay panel recommendations also helping. The rural focused-government spending will also be of aid. The Rs2.11 trillion recapitalisation programmes will ensure that the state-run banks are well positioned to support the growth, it added.

The external sector should also support growth as global recovery will help boost exports, which had faced some headwinds after the GST implementation.  Attributing the continuing slowdown to the impacts of the demonetisation, goods and services tax (GST) implementation and weakness in agriculture, rating agency CRISIL has maintained its FY19 growth estimate at 7.6% on the low base.

So, the government walks a tight rope facing the head winds of demonetisation and GST that have put a halt to a fast growing economy when Modi took over in 2014 and on strategizing on how to spell out its policy for FY 2018-19 in the upcoming budget on February 1 this year, facing a tide of criticism from opposition parties led by the Congress which claimed a moral victory in Gujarat elections and the public expecting great reliefs with the general elections for a Government has to reorganise GST to please small trade and industry, put cash in the hands of the public to spend, raise public expenditure without raising inflation rate, revive the economy so that investors’ confidence in India as a favourite destination for putting their money in remains.

(TN Ashok)