The second advance estimate of economic output growth for the current fiscal year shows growth picking up, but, at 6.6%, still falling short of even the Reserve Bank of India’s estimate of 6.7%, leave alone the optimistic expectation of close to 7% in some quarters. There is a silver lining, however. Fixed capital formation, as a proportion of GDP, is not as low as initial estimates had put it to be, but has inched up from 30.3% in 2015-16 to 31.4% in 2017-18, at constant prices, although, in current prices, the investment rate is stuck at 28.5%. Another piece of good news is that taxes on goods and services, net of subsidy, would have grown in the current year, the first year of implementing the goods and services tax (GST), at 12.3%, about a third faster than growth in gross value added. Of course, gains from petroleum taxes contribute to this, apart from GST; but it is still good news.
Growth in 2018-19 can easily accelerate, provided capital market volatility that can be expected from the promised three upward revisions of policy rates by the US Fed, does not prove sharp enough to feed into the real economy.
The widening of the current account deficit this fiscal to 1.9% of GDP, is good news when perceived as absorption of foreign savings to augment domestic investment, and that is favourable for faster growth next fiscal. But the biggest constraint on growth is the bad loan problem of the banking system. True, they are being resolved via the working of the Insolvency and Bankruptcy Code, and the government is recapitalising the banks. But the process of getting the banks back on their feet and running could take a couple of years.
The government should focus on making the bond market function effectively, apart from on developing viable infrastructure projects. The move to sell tolling rights of functional highways to private equity and invest the proceeds in new projects is sound. Once the bond market vets and finances infrastructure projects, goldplating would come down, too, lowering the risk of bad loans. Once infrastructure gets going, so will growth.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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