Some projects have touted India to grow at high rate of above 7% in the coming years due to some positive economic indicators.
But these seem to ignore the role of the present favourable external circumstances and other inherent risks within the domestic economy.
What are favourable indicators?
While demonetisation precipitated in the Indian growth rate dipping below 6%, it has now recovered to about 7%.
Going ahead, India is projected to grow at 7% in the current year and become the world’s fastest growing economy (overtaking China).
Additionally, the Indian economy’s foundations have also been strengthened in the last few years on multiple fronts.
Inflation has moderated to around the 4-5% range and trade balances with the rest of the world have improved.
The current account deficit has come down to about 1.5% of GDP.
Forex Reserves with the RBI has swelled to a comfortable $420 billion.
Moreover, despite political compulsions, central government has curtailed budget deficits considerably, albeit a minor target slip.
While these figures paint a dynamic and optimistic picture of the economy, there are significant vulnerabilities that deserve attention.
What are the concerns?
Investment - For sustaining high growth, the economy need to continuously add to its “production capacity” through new investment flows.
Productive investment is money that is spent for building roads, ports and other public infrastructure, factories, and workforce quality enhancement.
India is seeing a sharp decline in the rate of investments in recent years which has come down from 34% of GDP in 2014 to 30% currently.
More strikingly, the current investment rate is the lowest in about 15 years.
This makes it incompatible with the aspired high growth rate of 7-8%.
Industrial Production – The industrial sector is a highly critical engine for growth in the Indian context.
But this has shown weakness lately.
Manufacturing grew by 6% in 2016, but plummeted to an abysmal 2% following demonetisation.
The subsequent recovery has not been that encouraging.
Banks - Banking finance plays a significant role in the economy, particularly in the context of small and medium sized enterprises and agriculture.
Mounting NPAs has created enormous stress in the sector, which has affected the ability of bankers to lend out to businesses, which is hurting the economy.
Notably, the pace of lending has come down significantly from 2014-16, when it grew at 10% to the present growth rate of a mere 6%.
Also, the proportion of NPAs to the gross outstanding loans has doubled during the same period from 5% in 2015 to 10% currently.
Fiscal Statistics - While the majority focus has always tended to be on the Central budget, the many states have displayed little fiscal discipline.
The combined Fiscal Deficit of the centre and all states accounts for as large as 6.5% of GDP.
Moreover, India’s overall sovereign debt is a whopping 70% of GDP, which has not come down considerably in recently years.
This is in contrast with a number of other emerging market economies that had reduced their sovereign debt considerably over the past 5 years.
What are the potential risks?
Inflation - While policy measures have helped control inflation, the decline in inflation has largely been driven by extraneous factors.
Food and energy prices are important components of the ‘Consumer Price Index’ (CPI) and decline in their prices has brought inflation down.
If prices of these commodities increase in future, it would be difficult for the RBI (through its monetary policy actions) to keep inflation under control.
Imports - The prices of “Oil, gold and coal”, which constitute almost 50% of total imports in India, has declined considerably in recent years.
Hence, the bettering of India’s trade balance is more a reflection of extraneous factors (decline in prices of imports), rather than increase in exports.
Additionally, lower oil prices have also benefited the Central budget as it has helped in reducing fuel subsidies and has bolstered fiscal prudence.
But the prices of the critical import commodities could increase anytime and end up constraining the trade balance.
Why have the growth projections failed to capture these?
While some claim that growth numbers are being tampered to project an optimistic economic outlook, it would be a stretch to affirm these.
But one can argue that there is a genuine difficulty for statisticians to quantify the numerous variables and its potential impact on GDP.
Also, initial estimates are based on formal sector projections, which get revised subsequently as the information from the informal arenas comes in.
It is to be noted that both demonetisation and GST had largely affected the informal businesses in the short term, which needs to be accounted for.
Hence, while the projections may be academically correct, there is a need for considerable caution.
