Looking back at 2017-18

With the twin shocks of demonetisation and the goods and services tax (GST) disrupting economic activity, India’s economic growth slowed to 6.6 per cent in FY18, down from 8.2 per cent in FY16 (Chart 1). But as seen in Chart 2, growth did pick up in the third quarter of FY18, rising to 7.2 per cent from 6.5 per cent in Q2FY18, suggesting that the effects of demonetisation and the GST are fading away. And while both manufacturing and investment activity slowed in FY18 (Chart 3), there are some signs of a revival in both.

On inflation, there is reason to cheer. The headline retail inflation rate has fallen from 6 per cent in FY15 to 3.5 per cent in FY18 on the back of falling food prices. But as seen in Chart 4, core inflation continues to remain sticky.

On the external front, there is reason to worry. The current account deficit, which had declined from 1.3 per cent of GDP in FY15 to 0.7 per cent in FY17, is expected to climb to 1.6 per cent in FY18 (Chart 5). Credit Suisse estimates that it could rise to 2.6 per cent of GDP over the next 12 months. On the financial front, despite repeated assurances that the worst is over, non-performing loans continued to accumulate, rising to 10.4 per cent (of advances) at the end of Q3FY18, up from 7.09 per cent at the end of FY17 (Chart 6). Bank credit continues to remain depressed with delays in the resolution of the twin balance sheet problem (Chart 7).

The stock markets though remained ebullient despite lacklustre earnings. But as seen in Chart 8, small- and mid-caps continue to outperform large-caps. The primary markets have also soared back to life. As seen in Chart 9 the number of IPOs almost doubled to 200 in FY18, up from 105 in FY17, while the issue size has risen from ~290.5 billion in FY17 to ~837.6 billion in FY18.