Don’t underestimate global economic impact on India’s GDP

DelhiWritten By: Amitabh TiwariUpdated: Jul 05, 2019, 10:41 AM IST

Finance Minister Nirmala Sitharaman. Photograph:(ANI)

Story highlights

Higher investments are likely to foster job creation; unemployment being a major issue facing the economy at a 45-year-high. 

The Economic Survey 2018-19 was presented in the Parliament, as is the practice, a day before the Union Budget. 

The survey points out that amid weak global growth during the last five years, India took a few giant strides forward becoming the sixth largest economy as well as the fastest growing major economy in the world. 

The average inflation was less than half the level of the preceding five years, lowest in post-independence history. 

According to the survey, the Indian economy is projected to grow at 7 per cent in 2019-20, up 0.2 per cent from 2018-19, on the back of political stability, which is likely to push up economic activity in the country (activate the animal spirits). 

To achieve the Prime Minister’s dream of India becoming a $5 trillion economy by 2025, India needs to attain and sustain a real GDP growth of 8% per annum. “This can be achieved by a ‘virtuous cycle’ of savings, investment and exports catalysed and supported by a favourable demographic phase,” says the survey.

Low oil prices compared to 2018-19 is expected to push the consumption, while low real interest rates are expected to provide a boost to investment; the two key levers of the Indian economy. 

Investment is the ‘key driver’ of the Indian economy, accounting for 32 per cent of the GDP. The survey points out that the investment rate, which was declining from 2011-12, seems to have bottomed out. Fixed investment growth has increased from 8.3 per cent in 2016-17 to 9.3 per cent in 2017-18 and 10.0 per cent in 2018-19. 

Investment is expected to pick up further on the back of higher credit growth, facilitated by lower interest rates and improved demand facilitated by a strong mandate, clearing all theories of political uncertainty.

Higher investments are likely to foster job creation; unemployment being a major issue facing the economy at a 45-year-high. 

As per a CRISIL report, system-wide NPAs have declined to 9.3 per cent as of March 2019 after tripling to 11.5 per cent in the four fiscals till March 2018. 

The continuing resolution of stressed assets in the banking sector highlighting the success story of the Insolvency and Bankruptcy Code is expected to give a fillip to the capex cycle, as per the Economic Survey.

India, unlike China, is a consumption-led rather than export dependent economy. India witnessed a deceleration in private final consumption in Q3 and Q4 of 2018-19, thus resulting in a slowdown in GDP growth.

The survey points out that this could have been due to low farm incomes in rural areas arising from low food prices and also due to the stress in non-banking financial companies (NBFCs), which affected its lending.

Private final consumption expenditure accounts for 60 per cent of India’s GDP with its growth rate mostly being higher than the overall GDP growth rate. 

Consumption is likely to pick up with an increase in rural wages, higher food prices (higher MSPs) and income support scheme of Rs 6,000 per year to farmers. All these measures are likely to boost rural demand. 

However, a weak monsoon and spill over impact of stress in the NBFC sector, present downside risks to consumption, says the survey.

June 2019, the first month of the monsoon season, recorded a 33% deficient rainfall — the worst in the last five years. Although IMD expects a near normal rainfall, region wise imbalances are expected to arise impacting crop production and agriculture growth. 

The liquidity crunch faced by the NBFC sector due to IL&FS default, loss of investor confidence and recent default by DHFL, shows that the sector is under stress. 

Non-performing loans are rising, currently at 6.1%, while the credit disbursements fell by 31 per cent in Q4 2018-19. All this is likely to lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending, the survey stresses.  

As per the Economic Survey, the growth rate of the world output is projected to fall further to 3.3 per cent in 2019 (-0.3 per cent). The US and China trade war, the outcome of Brexit and downside risk to China’s growth, all point towards weak global cues. In this light, export growth could remain weak, which in turn could impact India’s GDP growth.  The survey lays out a strategic blueprint for fructifying #Economy@5trillion. Now over to the Budget today!

(This article was originally published on The DNA. Read the original article)

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)