Long and Short of the Growth Reforms

There has been an increase in government expenditure over the past few quarters which has contributed to economic growth

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By Anis Chakravarty • Dec 30, 2017


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India's growth narrative over the last year can be defined by significant structural changes which may be regarded as partially responsible for the ongoing market uncertainty and short-term growth pains. These reforms, by their very nature, are targeted to have long-term growth impact and recovery.


In its latest bimonthly monetary policy statement, the Reserve Bank of India (RBI) lowered its gross value added projections for fiscal year (FY) 18 from 7.3 per cent to 6.7 per cent. Most of the estimates from other institutions also seem to suggest that the chances of achieving a growth number above 7 per cent seems unlikely in FY18. There are clearly pain points for the economy, the most prominent of them being the concerns in the banking system, especially stressed balance sheets in the public sector banks. As such, non-performing loans (NPLs) - where payments have not been made for at least 90 days - have grown by a significant 90 per cent in 2016 after growing by 22.8 per cent in 2015. At the same time, pace of new loans to industry have remained in the negative territory at 0.4 per cent Year-onYear as of September 17 - pointing to a continued weak investment sentiment. While the recently announced policy recourse in terms of Rs 2.11 trillion bank recapitalization plan may address capacity scarcity issue and improve lending capacity, this will at best be a slow process and will likely add to budgetary pressure. Farm loan waivers and housing allowance may further stretch the resources of the states thereby limiting capital expenditure.


Policymakers and other key stakeholders have been actively working on measures to boost growth and to try and reverse the persistent economic weakness. For instance, there has been an increase in government expenditure over the past few quarters which has contributed to economic growth, thereby preventing a sharper decline in the growth rate. In the coming quarters it is expected that apart from government expenditure, it is private rural consumption that is likely to drive growth. We also expect that investment demand might see a major turnaround in the quarters to come I The real risk will be to make the right short term decisions about the composition of fiscal expenditure to ensure that short-term successes do not have long-term costs. Subdued growth seen before policy actions "T(Y-O-Y, %) 10 9 8 7 6 5 Mar-16 June-16 Sept-16 Dec-16 Mar-17 Jun-17 FY-18 Demonetization GST Deloitte Estimate 6.6 (+/-0.2) as market adjust to disruptions and risk appetite improves. This in part might be augmented through ramped-up public sector infrastructure spending.


The positive growth view is further cemented through operations of the stock market which have provided optimistic readings of corporate earnings growth. While capital markets have rallied over the last year (Nifty50) gaining close to 20 per cent at the end of Oct 517, reflecting increased participation and confidence shown by foreign portfolio investors (FPIs; investments in stock and bonds market), cumulative foreign direct investment (FDI; international capital flows into businesses) flows also reached record highs. The expected upswing in domestic environment is likely to be supplemented by a stable outlook on crude oil prices which might help in keeping the economy strongly set on fiscal deficit target while a 30 pace gain in "ease of doing business" ranking is likely to stimulate muted investment sentiment. On the external front, export growth has continued to grow markedly in recent months to 25.8 per cent as of Sep'17 and positive predictions for global growth for 2017 and 2018 should help further boost exports. Even with these measures and policy initiatives, one should be careful in expecting a rapid increase in economic growth. The effect of the recently announced economic package as well as the other structural reforms, aimed at long-term sustainability, may trickle down to growth in productivity. The real risk will be to make the right short term decisions about the composition of fiscal expenditure to ensure that short term successes don't have long-term costs.

(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)

Anis Chakravarty

Lead Economist and Partner, Deloitte India

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