In­dian Econ­omy in 2018: Cur­rent Sta­tus, Prospects and Chal­lenges

A TO Z INDIA - - Editorial - - Indira Sri­vatsa

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.

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