Turnaround time – Business Line–02.06.2018

Q4 GDP figures for 2017-18 indicate an economic revival, but these are early days yet

With growth climbing consistently over the last three quarters of 2017-18, it is pretty clear that the economy has gathered steam, having set aside the impact of demonetisation and introduction of GST. Hence, the Centre is justified in forecasting 7.5 per cent GDP growth this fiscal, against 6.7 per cent in FY18. Its confidence stems from the pick-up in investment, which at constant prices has risen from 31.1 per cent of GDP in 2016-17 to 31.4 per cent in FY18. Demand seemed to have picked up on the back of a concerted increase in government spending, from 10.3 per cent of GDP in 2016-17 to 10.8 per cent last year at constant prices, perhaps largely on account of pay panel obligations. While 2017-18 recorded the slowest growth in four years of the Modi government, a virtuous cycle of investment and consumption can once again make consistent 8 per cent growth a reality. Healthy topline and bottomline growth in the corporate sector, as well as buoyant cement and steel output point to an upturn in the business cycle. Investments in roads and housing seem to have acted as growth drivers. The recapitalisation of public sector banks and smoother implementation of bankruptcy proceedings will go a long way in cleaning up stressed bank balance sheets and enabling disbursal of project loans. The ongoing formalisation of the economy in the wake of GST is expected to ease business compliance once the present glitches are sorted out, and this may spur investment. A sanguine monsoon forecast may lift farm prospects, creating demand for industry. With a year to go for the general elections, a pick-up in growth could not have been better timed, from the Centre’s point of view.

However, there are some clouds on the horizon. Moody’s has, for instance, predicted a growth rate of 7.3 per cent in 2018-19, less than that of the Centre, on account of fuel inflation. The rupee has been under pressure this year, on account of high-cost fuel imports and an exit of foreign funds on account of a hardening dollar. In order to check the ongoing exit of capital as well as rising inflation, the Reserve Bank may be forced to raise interest rates soon. With the economy once again doing well, it would be a pity if rising interest rates were to act as a party-pooper. Capacity utilisation remains at 75 per cent, an indication that investment activity has picked up but not across sectors.

Unless the Centre restricts the pass-through of fuel price increases by reducing excise duties, India may once again end up in an unenviable situation of falling growth and rising inflation.

via Turnaround time – Business Line

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s