A View on India’s Current Growth Rate

September 29, 2018
investment graph

We can say that the Indian economy is doing well with the given conditions of global challenges (trade wars and oil prices) and self-caused wounds such as demonetisation. Speaking of the current scenarios, we have witnessed a healthy growth of 8.2% in the first quarter of this fiscal. The 2-year high growth rate is achieved by a good performance from the manufacturing and farm sectors. We can see that this steady growth rate has helped India to cement its position at the top of the fastest growing economies in the world. The primary competitor for this title, China has managed only a 6.7%. India’s $2.6 trillion economy is now the sixth largest in the world surpassing the French.

Threats to the Indian growth

The headwinds including high oil price, slower world growth and tighter financial conditions are potential threats to the growth rate of the Indian economy. Even though India possesses a small share of world trade, the proposed American-Iranian harsh sanction can cause a higher inflation rate in India. Every $10 hike in crude can result in a 30 to 40 basis point push up in the inflation rate. This will affect the Indian growth rate by about 15 basis point. With the recent performance of the Indian rupee which has become the worst performing in Asia, the problems are going to be compounded.

Closer Look on Recent Growth

The economic activities such as manufacturing, electricity, gas, water supply and other utility services, constructions and public administration registered a growth rate of more than 7% in the last quarter. Agriculture, mining, fishing, trade, hotels, broadcasting, real estate and professional services have registered a growth rate lesser than 7%.

The lingering after-effects of GST and demonetisation may be finally wearing off from the growth rate. But a closer look is revealing more and more trouble for the Indian economy. It can be found that the higher growth rate of GDP was mostly favoured by construction and public administration. These two sectors benefited from government expenditure which would wane soon. Higher GDP of last fiscal year was also a base effect of government expenditure. So, maintaining such high growth rates in the following quarters without causing a budgetary slippage is nearly impossible, especially with the oil price and rupee standing in the way. The subdued growth rate of the service sector is another worry. If the total growth rate is to be maintained above 8 per cent, the service sector surely needs to fire up.

How to grow..

Coming back to good news, the private consumption has become more robust. Also, we can see that the manufacturing sector and construction sector are also showing good growth rate. Since these sectors are job creating, we can expect a correlated growth in other industries too.

Sustaining a growth rate of over 8 per cent with the current method of govt expenditure is not going to work for long. Significant traction over the private investments and implementation of reforms to raise productivity is required shortly. The policy paralysis due to the imminent general election is a threat to these requirements.

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