By Vishal Kale
As per the Macro-Economic Framework Statement, indications are that global economic growth is gradually picking up. This augers well for Indian exports which are highly responsive to the dynamics of global economic activity. On the other hand, the increasing global prices of oil and other key commodities may exercise an upward pressure on the value of imports. Domestic demand is expected to get a boost from an accommodative monetary policy and the unleashing of domestic trade and consumption as the economy gets remonetised.
The macroeconomic scenario of India
As per the sectoral classification, the production of manufacturing sector declined by 0.3 per cent during April-November 2016-17. The electricity and mining sectors registered growth rates of 5.0 per cent and 0.3 per cent respectively during April-November 2016-17.
Inflation seems under control, while the Banking Sector is showing some signs of stress due to rising Non-Performing Assets (NPAs). As per the First Advanced Estimates released by the Central Statistics Office, the economy is estimated to grow at 7.1 per cent in 2016-17, as compared to the growth of 7.6 per cent achieved in 2015-16. The growth in agriculture, industry and services is estimated at 4.1 per cent, 5.2 per cent and 8.8 per cent in 2016-17 respectively as opposed to 1.2 per cent, 7.4 per cent and 8.9 per cent respectively in 2015-16. It is noteworthy manufacturing, as seen above, is lackluster.
Statistical Bureau India | Photo Courtesy: Statistics WorldwideFinally, our external debt seems reasonably healthy with a predominance of long-term debt. From the above points, it can be seen that the major challenge is boosting confidence and investments in manufacturing. The growth in fixed investment at constant prices declined from 3.9 per cent in 2015-16 to -0.2 per cent in 2016-17.
Demand-side economic policy
The expectations of an improvement in demand and consumption will depend on successful remonetisation and budgetary steps in Agriculture, Transport and Telecom. Increased agricultural credit as well as a focus on the poor and the farmers will create opportunities for growth. The current budgetary focus on rural housing, which is a known and well-studied demand impetus, as evidenced from its success in Turkey or Singapore. From these policies, it is clear that there is a decided positive impetus towards consumption recovery.
[su_pullquote]Economic growth is dependent on new debt issued, which was initially slow in the run up to demonetisation.[/su_pullquote]
However, the fact is that industrial credit has been relatively flat for a few months now. Economic growth is dependent on new debt issued, which was initially slow in the run up to demonetisation. The structural issues, in that a large percentage of the exposure in Public Sector Banks (PSBs) was to large corporates. This is clearly both a problem and an opportunity, as the increased focus on SMEs means that the banks have space to increase credit to this sector.
A few switches away from higher growth
From the above, we can see that there is a positive impetus to growth. The remonetisation has happened as assumed in the Budget. Housing, SME and Agriculture have taken priority in policy for the current fiscal year.
Furthermore, the reality of the Goods and Services Tax (GST) will come into effect. Only time will reveal its true impact. While there is stimulus to growth & the conditions are right, demand side improvements may take some time to deliver.
Slower credit growth, bad-debt issues, the Index of industrial Production (IIP) and manufacturing indices, all indicate a revenue-side challenge.
We still have reasons to be positive. India also now has excellent liquidity and a lower cost of funds due to demonetisation. If credit growth responds by expanding then we might just witness a stunning turnaround.