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Indian economic snapshot 2017-18

  The Indian economic scene looks upbeat, although there are inherent challenges. At a time when the global economic growth appears to be positive, the Indian economy too looks set to grow significantly. An analysis.  

Dr Suresh Srinivasan

The financial year 2017-18, towards the end of which we are marching, is a crucial year that is expected to consolidate all the efforts of the current BJP government in delivering its election promises. It is also an important year, as the same government will come back to the people of the country for being re-elected in the forthcoming general elections scheduled for early next year. How has the country functioned in 2017-18? Has the economy improved over the last four years? Are the market indices and indicators reflecting such progress? What does the future have in store for the economy?
Before analysing the Indian economy, we need to understand the status of the global economy, which is picking up pace quite well as compared to last year. Reliable forecasts expect that the global economy will grow at around 3.5% during 2017, and that the growth momentum will continue in 2018, with the growth rate expected to reach 3.7% in 2018. According to the forecast of the Asian Development Bank (ADB), the Chinese economy, which has seen double-digit growth for the last two decades, is expected to cool down to 6.7% in 2017, and will further slow down to 6.4% by 2018. In effect, the global economic and geopolitical factors are reasonably positive, leading to a firm possibility of a conducive environment for growth in the next 12 to 18 months.

Economic growth

In 2017-18, India’s economic growth is expected to reach 6.7%, although this is lower than the earlier projections of 7.3%. Primarily, the cascading effects of the note ban and demonetisation, and the implementation of the goods and services tax (GST) have had a profound short term negative effect on the Indian economic activity and its growth. However, the rating agencies also point out that the short term negative effects are slowing waning, and longer term benefits will start emerging in the next 6 to 36 months.

Services sector

A recent report by Morgan Stanley, the global financial services firm, on India’s Information Technology sector has thrown a positive light that the industry problems are lessening.
More specifically, global technology investments and outsourcing will pick up and Indian IT companies are bound to benefit from this. With this report, the outlook of most of the large companies in the Indian IT sector improved and their stock prices surged, giving a boost to the benchmark index Sensex of Bombay Stock Exchange.
In fact, this is one of the primary reasons that moved the Sensex beyond 35,000 points to reach historic highs over the last month.

Manufacturing sector

The overall growth story in the economy, recovery of key indices of Index of Industrial Production (IIP), purchasing manager’s index (PMI) and overall optimism surrounding the long term benefits that the key reforms including GST can bring to the economy, are being positively perceived by Indian corporates as well as foreign institutional investors (FII). The FIIs had already invested more than a billion dollars in the Indian markets this year alone, which is an extremely optimistic sign.
It is interesting to note that India’s growth declined to a three year low of around 5.7% at the beginning of the current fiscal, nine months ago. The turnaround, therefore, is commendable, wherein sentiments and perceptions have positively improved and a high growth path is being firmly established.
India’s industrial production increased close to 8.5% in 2017 as compared to a year ago. The manufacturing sector across segments showed positive outlook. The index of industrial production (IIP) that measures the country’s industrial output in certain core sectors increased as compared to last year, and stood at more than 125. The manufacturing sector grew by more than 10% as compared to the last year.
The Manufacturing Purchasing Managers index, an indicator that demonstrates the quantum of output and new orders, has expanded at the fastest rate in the last five years and touched 54.7 by the end of 2017. Any reading above 50.0 indicates the economy is growing and expanding. More investments are likely to pour in, and is expected to pick up on the back of such expansion. More importantly, once the GST system becomes well-tuned, output from smaller and medium sized manufacturers is expected to steeply increase.


Employment

Until such manufacturing growth fully sets in, the Indian economy is expected to have a higher unemployment rate of around 3.5%, higher than earlier projections. The employment is a “lagging” indicator, which will be followed by investments and manufacturing sector growth, which are “leading” indicators. That is the reason that recent reforms like GST needs to sink into the economy, and eventually result in higher investment and manufacturing output for unemployment levels to reduce. The present BJP government will have to strive to improve the employment rate before the upcoming general elections scheduled for early 2019.

Inflation

With industry output and manufacturing sector steadily growing, stronger demand resulted in India’s monthly whole sale price inflation (WPI), which stood at around 3.58% for December 2017, as compared to 2.10% during the last year.
Crude price
This is a cause for concern, and can seriously impact India’s finances if the trend continues. Crude price globally has steadily been on the rise, and is likely to impact India’s imports severely. Petrol prices at Indian pumps reached the highest level since 2014, and diesel also touched a record high. The government has been
cutting excise duties to a certain extent in order to not let the entire burden be passed onto the retail consumers, but with everything said and done, the retail prices are, in fact, increasing.

Exports

India’s exports have grown at around 12% per annum during the first nine months of 2017. But still, we are likely to fall short of the growth in exports we achieved during the previous year. To top it all, import concerns, mainly due to the enhanced crude bill, could be worrisome. With the manufacturing sector still to cash in on the full potential perceived on the back of the “Make in India” projects, exports have not been up to the mark.

Disinvestment

The Oil and Natural Gas Corporation (ONGC) will acquire the government’s entire 51.11% shares in Hindustan Petroleum (HPCL) for more than `37,000 crore. This will result in India reaching its divestment target of `72,500 crore in 2017-18. In the past, many years’ governments have failed to achieve disinvestment targets, as a result of which the fiscal deficit targets also slip.
In summary, the Indian economy’s stability has increased, investor perception has turned positive and the mood is upbeat. We seem to be well poised for a strong growth in the next two years.