Indian Economy in 2018: Current Status, Prospects and Challenges
With the New Year bells ringing, good news is underway for India as its economy is poised to win back its tag of the fastest growing economy in the world. The recent upgrade of India’s rating by the US based credit rating agency Moody’s (Baa2 from Baa3) in recognition of the reforms agenda pursued by the Government is a major boost to investor confidence. Further, as the short term disruptions caused by major reforms such as the Goods and Services Tax (GST) and demonetization recede, the economy is on the rebound and is likely to achieve higher growth targets in the New Year.
Gross Domestic Product (GDP) is on a recovery path after slowdown in the first quarter of 201718, and real GDP growth for the second quarter (2QFY18) increased to 6.3% from 5.7% in the previous quarter, a likely fallout of the introduction of GST. The second half of 2017-18 will witness a higher growth rate, and this is further expected to consolidate in the coming New Year, as the benefits of GST and other reforms gain traction.
The Reserve Bank of India (RBI) kept policy rates unchanged in its fifth bi-monthly monetary policy meeting on 6th December, 2017. However, industry is hopeful that going forward, RBI would lower interest rates to boost broad-based investment and consumption activity which in turn would promote economic growth.
Credit growth to the non-food sector shows encouraging signs of pick-up in the last few months. Recapitalization of Public Sector Banks may bolster credit flows further and ease their stressed assets situation.
Firms rated low domestic demand followed by high commodity prices as main concerns in CII’s Business Outlook Survey. Stepping up private investment remains a major macroeconomic challenge in the next year.
Inflationary pressures also remain a concern. Though food prices are likely to be contained on account of favourable monsoons, caution must be exercised as upside risks still remain in the form of implementation of farm loan waiver and 7th Pay Commission hand-outs.
India’s share in world exports is currently at 1.8%. Efforts to increase this figure by way of providing export credit to manufacturers, increasing the capital base of Export Credit Guarantee Scheme (ECGC), increasing subvention to 4% etc. must be undertaken.
The economy benefitted from increased foreign inflows during the latter half of 2017. While this is good news, efforts to contain further appreciation of the rupee should be in place as further strengthening may affect exports and job creation.
Bank credit growth hit a 20 year low in 2016-17 with Non-Performing Assets (NPAs) at 9.9%. India has been ranked fifth on the list of countries with highest NPAs. Though bank recapitalization efforts are underway, the economy needs to recover from the bad loan problem quickly for favourable economic growth in the future.
The infrastructure deficit is a major concern and infrastructure investment needs to be stepped up as currently it is not in par with the needs of the economy.
Other challenges for the economy include addressing infrastructural bottlenecks in the agricultural sector, investment in human resources to leverage the demographic dividend, increasing expenditure on education and healthcare sectors, and social security provision for the unorganized sector.
With on-going reforms that are beginning to positively impact the economy, CII is optimistic about Indian growth prospects in 2018. At the same time, policymakers need to be watchful and address the current macroeconomic challenges for a sustainable and fruitful recovery.