The Indian economy has shown a strong V-shaped recovery driven largely by domestic growth impulses.
- Nine consecutive quarters since the fourth quarter of 2015-16, Gross Domestic Product (GDP) growth fell quarter after quarter from a peak of 9% to a trough of 5.6% in the first quarter of 2017-18.
- As is widely recognised, this was due to demonetisation and the transitory adverse effects of the goods and services tax implementation.
- These eventually subsided and for the last three quarters, growth steadily recovered to 6.3%, 7.0% and 7.7% in the second, third and fourth quarters of 2017-18, respectively.
- Many of the government’s policy initiatives have shown a clear productivity-enhancing supply-side thrust including demonetisation and the GST.
- The new Monetary Policy Framework agreement has institutionalised a consumer price index (CPI) inflation target of 4% on average.
- Key policy initiatives (Make in India, Start-up India) also aim at improving productivity.
- Two early policy successes are related to market determination of mineral and spectrum prices.
- The power sector further benefitted from the Ujwal DISCOM Assurance Yojana scheme.
- For real estate and banking, the regulatory framework was changed.
- Additional fiscal space was created by better targeting of subsidies while expansion for rail/road projects was prioritised.
Short-term drags on India’s prospects
Two factors may create short-term drags on India’s prospects for maintaining a sustained level of high growth:
- rising global crude prices and
- prospects of fiscal slippage.
- Global crude prices recently touched $80 a barrel. for the first time since 2014. The supply factors include U.S. sanctions on Iran and the crisis in Venezuela.
The demand side:
- According to the World Bank, world oil consumption grew strongly in 2017, up by 1.6% year-on-year.
- In 2018, U.S. consumption growth is expected to gather further momentum.
- Rising crude prices may adversely affect most indicators of India’s macro balance including trade and current account deficits, inflation, exchange rate and fiscal deficit.
GDP in track:
- The Centre’s fiscal deficit-GDP ratio, after showing a steady improvement since 2014-15, slipped back to a level of more than 3.5% of GDP in 2017-18, exceeding the fiscal responsibility and budget management (FRBM) target of 3% and the budgeted target of 3.2%.