State of the economy

LAST WEEK the Reserve Bank of India (RBI) lowered its FY18 growth forecast to 6.7 per cent (gross value added), down from its earlier prediction of 7.3 per cent.

As gross value added (GVA) already grew by 5.6 per cent in Q1FY18, this revision, while downwards, implies that the central bank now expects the economy to grow by an average seven per cent over the rest of the financial year.

A look at the leading economic indicators suggests that the economy may well have bottomed out.

As shown in Chart 1, core GVA, which excludes agriculture and public administration, had grown by 5.5 per cent in Q1FY18, up from 3.8 per cent in Q4FY17. This could rise further as analysts expect manufacturing growth to perk up with one-off effects due to the shift to the goods and service tax (GST) fading away.

And while the index of industrial production continues to remain sluggish (Chart 2), other leading indicators such as the purchasing managers’ index (Chart 3) as well as the core sector data (Chart 4) suggest an uptick in economic activity.

Automobile sales have also perked up of late, as shown in Chart 5, suggesting healthy household demand. Exports have also risen despite concerns over a strong currency (Chart 6).

The corporate sector’s financial position also seems to be improving, as shown in Chart 7, with the median interest cover rising to 2.58 times in FY17, up from 2.28 times in FY15.

While some might point towards the flagging bank credit as a sign of lacklustre corporate demand for funds (Chart 8), to some extent it has been offset by firms stepping up fund raising from both the equity and debt markets.