By Mithilesh Kumar Sinha | EMN
If 2017 was the year of disruption, the government will be hoping that 2018 shapes up as a year of consolidation. Most analysts expect economic growth to pick up in 2018, helped by a global recovery and a domestic manufacturing rebound. Recent indicators of exports, core sector data and the manufacturing according to Purchasing Managers’ Index, indicate economic recovery is underway. Despite temporary setbacks, India’s economy has still caught up with that of France and the UK and in 2018 will have overtaken them both to become the world’s fifth largest economy in dollar terms.
GDP Growth
Gross Domestic Product (GDP) is on a recovery path after slowdown in the first quarter of 2017-18, and real GDP growth for the second quarter (2QFY18) increased to 6.3% from 5.7% in the previous quarter, a likely fallout of the introduction of GST. The second half of 2017-18 will witness a higher growth rate, and this is further expected to consolidate in the coming New Year, as the benefits of GST and other reforms gain traction.
Sectoral Growth
The agricultural sector registered moderate growth as erratic monsoon in several parts and flooding in some states impacted performance.
Industrial growth accelerated sharply during the second quarter of FY 2018 and jumped to 6.9% from 1.5% in the previous quarter, on account of a sharp increase in manufacturing and electricity, gas, water supply and utility services. Manufacturing registered an impressive growth at 7% in 2QFY18 as compared to 1.2% posted in the first quarter. Services sector grew only marginally at 6.6% in the second quarter as compared to 7.8% in the previous quarter.
With the New Year bells ringing, good news is underway for India as its economy is poised to win back its tag of the fastest growing economy in the world. The recent upgrade of India’s rating by the US based credit rating agency Moody’s (Baa2 from Baa3) in recognition of the reforms agenda pursued by the Government is a major boost to investor confidence. Further, as the short term disruptions caused by major reforms such as the Goods and Services Tax (GST) and demonetization recede, the economy is on the rebound and is likely to achieve higher growth targets in the New Year.
India’s economy is likely to expand by 7.2 per cent in 2018 and go up further to 7.4 per cent in the following year on the back of strong private consumption, public investment and the ongoing structural reforms, a United Nations (UN) report said. “The outlook for India remains largely positive, underpinned by robust private consumption and public investment as well as ongoing structural reforms. Hence, GDP growth is projected to accelerate from 6.7 per cent in 2017 to 7.2 per cent in 2018 and 7.4 per cent in 2019,” the UN DESA report said.
There are promising growth impulses over the next year:
While average growth has risen after the reforms so has its volatility. Across a threshold, growth should become steady and self-sustaining. Counter-cyclical macroeconomic policy can also smooth growth, provided there is space ongoing structural reforms will begin to deliver efficiency and scale economies. For example, GST will remove cost-increasing distortions such as multiple company warehouses across States.
Technology is also improving public services. For example e-metering and pre-paid mobile cards can considerably reduce electricity pilferage and the human interface that delivers free electricity at the cost of a reduction in its quality and viability. Even the poor are willing to pay for uninterrupted electricity supply., full inclusion in a country of more than a billion people increases the market size for mass consumer goods and induces innovation. New technologies can leverage our youthful skills and reduce the prices of mass goods in a virtuous cycle.
The biggest challenge will be the management of government finances. The latest data showed that the government’s fiscal deficit reached 112% of the full-year target during April-November 2017. Most analysts now expect the government to breach the fiscal deficit target of 3.2% of GDP in the current year. The decline in GST collection for December indicates that the system is likely to take more time to stabilize.
The Indian economy will face renewed challenges from external developments like higher oil prices and rising interest rates which could worsen both the current account and fiscal deficits India’s challenges will shift from the local economy to global issues as domestic growth picks ups, a reversal from the situation in the last three years. “Over the last three years, we saw a good macro and a tough micro. In 2018, we are likely to see a tough macro and a better micro. What is needed is a stable policy environment and commitment to basic economic goals. Without that, growth or development cannot happen even when that is the only way to raise the country to convert its potential.
