A sig­nif­i­cant rise in pri­vate in­vest­ments and con­stant re­forms are needed to ac­cel­er­ate In­dia’s growth story.

Business Today - - COLUMN - By D. K. JOSHI

FY2017/2018 was one of those rare years when the In­dian econ­omy slowed even as the world econ­omy ac­cel­er­ated. The twin shocks of de­mon­eti­sa­tion and de­stock­ing be­fore the im­ple­men­ta­tion of Goods and Ser­vices Tax (GST) and the fol­low­ing glitches culled In­dia’s GDP growth down to 6.6 per cent.

Con­se­quently, the av­er­age GDP growth over the past four fis­cals fell to 7.3 per cent. Even then, In­dia emerged as the fastest-grow­ing large econ­omy glob­ally. The last fis­cal may well prove to be a wa­ter­shed as far as re­forms are con­cerned with the im­ple­men­ta­tion of GST and the In­sol­vency and Bank­ruptcy Code (IBC).

These are game chang­ers over the medium term. De­spite im­ple­men­ta­tion glitches, GST has helped cre­ate a com­mon mar­ket, im­proved lo­gis­ti­cal ef­fi­cien­cies and in­creased for­mal­i­sa­tion of the econ­omy. The Na­tional Com­pany Law Tri­bunal process un­der the IBC will also speed up the res­o­lu­tion of bad loans be­gin­ning with steel and im­prove cor­po­rate credit cul­ture over the medium run.

The eco­nomic out­look for the cur­rent fis­cal, the last year of the Modi gov­ern­ment’s cur­rent term, prom­ises to be sunny, with clouds. It holds true for the global econ­omy too. The good news is that the global econ­omy will pick up speed and is pro­jected to grow at 3.9 per cent in 2018 with the US and the Euro­pean Union GDP grow­ing at 2.9 per cent and 2.3 per cent, re­spec­tively. Global trade, too, is grow­ing faster than GDP for the first time in the last six years, cre­at­ing op­por­tu­ni­ties for ex­port growth.

The bad news is that oil is hov­er­ing at $80 per bar­rel and anti-glob­al­i­sa­tion sen­ti­ment/pro­tec­tion­ist winds threaten to blow away nascent trade re­cov­ery.

Af­ter two sub-par years, the In­dian econ­omy is ex­pected to grow at 7.5 per cent in 2018/19. On a sober­ing note, the pro­jected up­turn is driven partly by the low-base ef­fect and trails the 10-year av­er­age GDP growth of 7.6 per cent. Growth in this fis­cal will largely be con­sump­tion-driven, aided by some pickup in ex­ports and in­vest­ments.

We ex­pect an im­prove­ment in ca­pac­ity util­i­sa­tion this fis­cal, par­tic­u­larly in ce­ment, com­mer­cial ve­hi­cles, steel, alu­minium and trac­tors. But it won’t be enough to trig­ger a robust pri­vate sec­tor in­vest­ment re­vival. Thank­fully, debt-heavy in­fra­struc­ture com­pa­nies con­tinue to delever­age.

Po­lit­i­cal un­cer­tainty due to gen­eral elec­tions does not au­gur well for big-ticket pri­vate in­vest­ment. Only a mild im­prove­ment is ex­pected this fis­cal with the gov­ern­ment’s fo­cus on af­ford­able hous­ing and in­fra­struc­ture cre­ation.

Also, In­dia’s oil im­port de­pen- dence (share of oil im­port in to­tal oil con­sump­tion) has risen from 82 per cent in 2011/2012 to about 86 per cent cur­rently. A sharp and sus­tained in­crease in global crude prices can singe In­dian macros.

We project in­fla­tion for 2018/2019 at 4.6 per cent with an up­ward bias. A back-of-the-en­ve­lope es­ti­mate shows ev­ery $10 rise per bar­rel of crude oil can in­crease In­dia’s fis­cal deficit by 8 ba­sis points ( bps) and cur­rent ac­count deficit by 40 bps, ce­teris paribus.

In an en­vi­ron­ment of ris­ing yields in the US af­ter exit from quan­ti­ta­tive eas­ing, wors­en­ing macros raise the spec­tre of cap­i­tal out­flows and weak­en­ing of cur­rency. Some of these are al­ready play­ing out.

We ex­pect cur­rent ac­count deficit to rise to 2.5 per cent of GDP in 2018/19 from 1.9 and 0.7, re­spec­tively, in the pre­ced­ing two years. It is worth­while to note that even with ex­pected wors­en­ing of macro pa­ram­e­ters, In­dia is more re­silient to ex­ter­nal shocks to­day than it was dur­ing the ta­per tantrum phase in 2013.

Tak­ing growth to 8 per cent-plus and sus­tain­ing it over the next three to five years would re­quire a lift through pri­vate in­vest­ments and re­lent­less im­ple­men­ta­tion of re­forms.

The writer is Chief Econ­o­mist at CRISIL

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