Monday, 25 September 2023 04:06 GMT

India gets rewards of reform

(MENAFN- Khaleej Times) India, Asia's third largest economic power, on Monday forecast that its economic growth would accelerate to seven to 7.5 per cent in the 2018-19 fiscal year to reclaim its position from China as the world's fastest-growing major economy.

A series of major reforms undertaken over the past year will allow real GDP growth to reach 6.75 per cent this fiscal and will rise to 7.0 to 7.5 per cent in 2018-19, thereby re-instating India as the world's fastest growing major economy, India's Economic Survey for 2017-18 said.

The bullish survey findings resonate with Prime Minister Narendra Modi's recent upbeat projection in Davos of doubling the size of the nation's economy by 2025. It also echoes the buoyant forecast made by the World Bank that India would likely to reclaim the position as the fastest growing major global economy in 2018, with growth expected to pick up 7.3 per cent, after conceding its position to China for a year in 2017.

Tabled in parliament by Finance Minister Arun Jaitley, the survey noted that though the plan has been to reduce the fiscal deficit from an estimated 3.2 per cent this year to 3.0 per cent in 2018-19, a pause in the move toward a lower deficit could be merited in order to give the economy momentum.

The annual survey, which is a crucial barometer to assess the state of the economy ahead of the national budget due to be presented on Thursday, also noted that reform measures undertaken in 2017-18 could be strengthened further in 2018-19, but cautioned that increase in crude oil prices in international market may dampen the upbeat spirit.

India's economic growth began to bounce back in the second half of the year and can clock 6.75 per cent growth this fiscal due to the launch of transformational Goods and Services Tax (GST) reform on July 1, 2017 and resolution of the long-festering Twin Balance Sheet (TBS) problem by sending the major stressed companies for resolution under the new Indian Bankruptcy Code, the survey said.

It observed that implementing a major recapitalisation package to strengthen the public sector banks, further liberalisation of foreign direct investment (FDI) and the export uplift from the global recovery had played a major role in boosting the growth.

India, which has been ranked by International Monetary Fund and World Bank as the world's third largest economy in terms of purchasing power parity (PPP), can be rated as among the best performing economies in the world as the average growth during past three years is around four percentage points higher than global growth and nearly three percentage points higher than that of emerging market and developing economies, the survey noted.

However, the survey cautioned that some of the factors could have dampening effect on GDP growth in the coming year are like the possibility of an increase in crude oil prices in the international market.

The survey pointed out that as per the quarterly estimates there was a reversal of the declining trend of GDP growth in the second quarter of 2017-18, led by the industry sector.

"The Gross Value Added at constant basic prices is expected to grow at the rate of 6.1 per cent in 2017-18 as compared to 6.6 per cent in 2016-17. Similarly, agriculture, industry and services sectors are expected to grow at the rate of 2.1 per cent, 4.4 per cent, and 8.3 per cent respectively in 2017-18," it said.

In the last three fiscal years, India experienced a positive terms of trade shock. But in the first three quarters of 2017-18, oil prices have been about 16 per cent greater in dollar terms than in the previous year. It is estimated that a $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the current account deficit by about $9-10 billion, according to the survey.

The survey highlighted that against the emerging macroeconomic concerns, policy vigilance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply provoking a "sudden stall" in capital flows.

"The agenda for the next year consequently remains full: stabilising the GST, completing the TBS actions, privatising Air India, and staving off threats to macro-economic stability."

According to the survey, India's foreign exchange reserves grew by 14.1 per cent $409.4 billion at end-December 2017and further surged to $413.8 billion on January 12, 2018.

"Within the major economies running current account deficit, India is among the largest foreign exchange reserve holders and sixth largest among all countries of the world," it added.

"Setting overly ambitious targets for consolidation - especially in a pre-election year - based on optimistic forecasts that carry a high risk of not being realised will not garner credibility," chief economic adviser Arvind Subramanian said in the survey.

"A pause would imply a fiscal deficit target similar to last year, that is 3.5 per cent of GDP," said Sonal Varma, chief India economist at Nomura Holdings Inc.

"The reason for a pause is primarily a structural reform like GST."

At Thursday's the budget presentation, Finance Minister Jaitley is expected to strike a balance between giving incentives to taxpayers before 2019 national polls and reassuring rating companies looking for an improvement in one of Asia's widest budget deficits. It is Modi's last budget before national polls in 2019.

The effects of an unprecedented ban on high-value currency notes in November 2016 and a new national sales tax in July, which pulled growth down to the levels seen before Modi's election in 2014, appear to be receding, the survey noted.

In response to the economic survey, sovereign bonds extended decline, with the yield on benchmark 10-year notes rising by four basis points to 7.35 per cent as of 1:43pm in Mumbai. The rupee declined 0.1 per cent to 63.5775, while Indian equities extended gains.

Issac John Associate Business Editor of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.


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