Indian economy back on the steady growth path, says finmin

The Indian economy is back on a steady growth path after slow growth over two successive quarters due to the transitional effects of two important measures – demonetisation and the introduction of the goods and services tax - the finance ministry stated in a presentation on Tuesday.

With all indicators – index of industrial production, core sector growth, stock indices, automobile sales, consumer spending etc - pointing to strong pick-up, there is expectation of very good growth from second quarter of current year itself, says the ministry.

India grew at a very strong pace of 7.5 per cent per annum in the three fiscal years from 2014 to 2017, with growth exceeding 8 per cent in 2015-16. There was a temporary slippage in growth in the last two quarters thanks to transitional effect of Demonetisation and GST, the ministry said.

Significant improvement in investment, trade, and industrial production, coupled with strengthening business and consumer confidence, are supporting the recovery. This would also help in growth of exports which is reflected in strong export growth of 25.6 per cent in September 2017 with April-September growth averaging nearly 12 per cent.

India's economic growth is also supported by the current global economic outlook, which shows relatively stronger activity in both advanced economies and emerging market and developing economies. Global economic activity is on the course of gradual improvement and the world GDP is projected to grow at the rate of 3.6 per cent and 3.7 per cent in 2017 and 2018 respectively, after remaining subdued in 2016, when it was 3.2 per cent, the finance ministry pointed out.

Inflation under control
Inflation has been brought under control partly due both to benign oil prices and the steps taken by the government and the Reserve Bank to get the economy out of the inflationary spiral to relatively stable prices. Inflation declined from nearly double digits in 2012-13 and 2013-14 to an average of less than 5 per cent since then.

Between July 2016 and July 2017, the inflation rate was close to 2 per cent. Inflation based on CPI is currently within the target of 4 per cent and is expected to be close to 3.5 per cent for the financial year 2017-18. Inflation is currently well within the target of 4 per cent. However, the RBI has projected it to increase to 4.2-4.6 per cent in the second half of the current financial year, a little higher than 4 per cent target, but within the range of 4+/-2 per cent.

Headline inflation based on consumer price index (combined) averaged 4.9 per cent in 2015-16 compared to 5.9 per cent in 2014-15. CPI inflation for 2016-17 averaged 4.5 per cent. The year-on-year inflation in April-September 2017 was 2.6 per cent compared to 5.4 per cent in the corresponding period of the previous year.

Extports sector
During 2016-17, India's exports grew 5.2 per cent while imports were up 0.9 per cent, which helped narrow the trade deficit. Merchandise exports and imports grew by 11.5 per cent and 25.1 per cent, respectively, in dollar terms during April-September 2017, resulting in widening of trade deficit from $43.4 billion in April-September 2016 to $73.1 billion in April-September 2017.

India's exports had declined in 2015-16 primarily on account of the sluggish global demand while its imports declined due to steep decline in international crude oil prices as well as the decline in the prices of other commodities

World trade volume (goods and services) growth continued to decelerate in 2016 to 2.2 per cent from 2.8 per cent in 2015 (IMF's WEO, October 2017). It is projected to pick up with growth of 4.2 per cent in 2017 and 4.0 per cent in 2018.

India's current account deficit (CAD) for 2015-16 was 1.1 per cent of GDP compared to 1.3 per cent in 2014-15. The CAD further narrowed to 0.7 per cent in 2016-17 on the back of the contraction in the trade deficit that narrowed to $ 112.4 billion in 2016-17 from $130.1 billion in 2015-16. However, current account deficit widened to $14.3 billion (2.4 per cent of GDP) during Q1 2017-18 from $0.4 billion (0.1 per cent of GDP) during Q1 2016-17, mainly on account of higher trade deficit in this period.

Lower levels of current account deficit have brought about much of macro-economic stability in the last 3-4 years. It may be noted that India's current account deficit was at dangerously high level of over 4 per cent in 2011-12 and 2012-13, leading to a significant instability in the exchange rate of the rupee, according to the ministry.

Foreign direct investment: Gross FDI flows to India in 2016-17 rose to $60.2 billion from $55.6 billion in 2015-16 and $45.1 billion in 2014-15, indicating the improved global confidence on the Indian economy. During April-August 2017, gross FDI inflow was $30.4 billion, higher compared to the inflow of $23.3 billion in the corresponding period of the previous year.

Foreign exchange reserves: Foreign exchange reserves of the country stood at $370 billion at the end of March 2017 against $360.2 billion at the end of March 2016. As of 13 October 2017 foreign exchange reserves of the country exceeded $400 billion. With increase in reserves in the last couple of years, most reserve-based external sector vulnerability indicators have improved, the ministry pointed out.

Fiscal consolidation
Fiscal deficit of the central government, which had reached level around 6 per cent of GDP in 2011-12 and averaged over 5 per cent between 2011-12 and 2013-14, has steadily been brought down to 3.5 per cent of GDP in 2016-17 and is expected to fall further to 3.2 per cent as per the budget estimates in 2017-18.

Fiscal deficit of the central government as a ratio of GDP was 3.9 per cent in 2015-16 and 3.5 per cent for 2016-17 (Revised Estimate) and is budgeted to be 3.2 per cent in 2017-18. Focus on expenditure rationalization with plugging loopholes in public expenditure and innovative revenue raising efforts have helped to achieve this, says the finance ministry.

The government's total outstanding liabilities-to-GDP ratio is budgeted to decline from 46.7 per cent by year-end 2016-17(RE) to 44.7 per cent by year-end 2017-18.

Tax revenue (net to centre) has increased by 16.8 per cent in 2016-17 (provisional) and it is budgeted to grow by 11.3 per cent in 2017-18.

Fiscal deficit during April-August is 96 per cent of the full-year budgeted fiscal deficit on account of front loading of expenditure, but the government expects to stick to the full year budgeted ratio of fiscal deficit of 3.2 per cent of GDP.

GST impact
The goods and services tax (GST), which subsumes a large number of central and state indirect taxes, has been a landmark reform that has been implemented with effect from 1 July 2017. "The launch of the GST represents an historic economic and political achievement, unprecedented in Indian tax and economic reforms, which has rekindled optimism on structural reforms" the finance ministry said. "This has resulted in unified tax across the country and has helped in removing transport restrictions on the movement of goods resulting in their faster movement and help in creating common market, reduction in corruption and leakage and further help in Make in India programme. It is expected to provide boost to revenues, investment, and medium-term economic growth. Despite the teething troubles that the government and the GST Council are addressing, initial results in the form of revenue raised seem encouraging, the ministry said."

While the introduction of the Insolvency and Bankruptcy Code and the black money probe will have some disruptive effects on corporate and bank finances over the medium term, these will get healed as the banking system gets back to normal.

Housing and infrastructure
Government has announced various measures in the Budget 2017-18 to promote growth of the economy which, inter alia, include push to infrastructure development by giving infrastructure status to affordable housing, higher allocation to highway construction, and focus on coastal connectivity.

The other growth promotion measures include: lower income tax for companies with annual turnover up to Rs50 crore, allowing carry-forward of MAT credit up to a period of 15 years instead of 10 years at present, further measures to improve the ease of doing business and major push to digital economy. The Budget also targeted to provide higher agricultural credit and to increase employment significantly.

Universal affordable housing scheme being implemented is expected to give a big boost to the construction sector. Under PMAY (Urban), 12 million units will be built with an outlay of Rs1,85,069 crore over next 3 years. Under PMAY (Gramin), 10.2 million units will be built (5.1 million units this year) with an outlay of Rs126,795 crore by the centre and the states by March 2019.

Government has consistently increased public expenditure on infrastructure in order to boost employment and provide renewed impetus to economic growth. The government's total expenditure this year has crossed Rs11,47,000 crore (up to Sept '17), out of the budgeted expenditure Rs21,46,000 crore (an increase of Rs1,20,000 crore over last year).

Special thrust of this drive is on key development sectors including rural roads, housing, railways, power, highways and digital infrastructure. The government has targeted capex of Rs3,09,000 crore for 2017-18, which is 31.28 per cent higher than last year, out of which Rs1,46,000 crore has been spent on capital works till September 2017. In addition, the centre has fixed a capital expenditure target for CPSEs of Rs3,85,000 crore for 2017-18, out which Rs1,37,000 crore has been achieved by CPSEs till Sept'17.

Government has consistently increased public expenditure on infrastructure in order to boost employment and provide renewed impetus to economic growth. The government's total expenditure this year has crossed Rs11,47,000 crore (up to Sept '17), out of the budgeted expenditure Rs21,46,000 crore (an increase of Rs1,20,000 crore over last year).

These combined with institutional reforms, including expenditure rationalisation and progressive elimination of leakages in public delivery through stress on targeting and direct benefit transfer, measures to improve policy transparency in governance and decision-making and liberalisation of FDI norms in various sectors; and approval of National Intellectual Property Rights Policy for laying down the future roadmap for intellectual property in India.