By Anshia Dutta
India is the second most populous country in the world and is tenth in rank amongst the largest economies of the world. In India, the growth rate in GDP measures the change in the seasonally adjusted value of the goods and services produced in the country during a quarter.
According to the Ministry of Statistics and Program Implementation of India, the government expenditure of the country in the last ten years (Q1 2008 Q3 2017) has been an average of ?30496.85 billion. The highest expenditure of ?54331.4 billion was incurred by the government in the third quarter of 2017 and the lowest spending was ?12405.1 billion made in the second quarter of 2008.
Key economic drivers of the GDP growth rate
The tertiary sector of India is the fastest growing sector of the economy with trade, hospitality industry, transportation, communication, insurance, finance, real estate, and business services accounting for more than 60 percent of the GDP. More than 50 percent of the labour force is employed in the primary sector. Agriculture, fishing, and forestry constitute around 12 percent of the GDP. The secondary sector makes up the remaining 28 percent of the GDP with the manufacturing sector and the construction sector comprising of 15 percent and eight percent of the GDP respectively. Mining, quarrying, electricity, gas, and water supply add up to the remaining five percent.
Along with increasing public expenditure, another vital driver of the countrys growth is the soaring foreign direct investment. Post the first year of Narendra Modi serving as the Prime Minister of the country, foreign direct investments made a 49 percent cap in insurance, e-commerce, and health insurance. In the first half of 2016, FDI jumped by 26 percent and the country claimed the title of being the most open economy in the world. The Indian economy surpassed the Chinese economy by attracting about $63 billion in FDI.
The growth rate of Indias GDP has been an average of 1.67 percent from 1996 till 2017. The growth rate had attained its lowest value at -2.30 percent in the first quarter of 2009 and its highest value at 6.20 percent during the second quarter of 2009. In the last quarter of 2017, the Indian economy expanded 7.2 percent year-on-year. This was the strongest growth rate since the third quarter of 2016 and the reason was attributed to a higher level of investment and public expenditure.
Public spending not conducive for growth anymore
Government spending played an integral role in increasing the GDP of the economy in the last two years. However, now India can no longer spend its way to higher growth because of the disruptions caused in the economy due to demonetisation and the nationwide goods and services tax (GST). Since the government is now focusing on reducing its budget deficit, its hands are tied by fiscal constraints.
Narendra Modi has until now increased thrust on building infrastructure. This has led to a fall in the private investments to multi-year lows. Following the cash purge and implementation of GST, the economys GDP growth was at its slowest pace in three years in the quarter ended June 2017. However, since June 2017, the growth rate has accelerated for two quarters straight. In Oct-Dec 2017, the growth rate was a staggering 7.2 percent which was not only a because of a rise in the government spending but was also a reflection of the 6.8 percent growth in non-farm and non-government sectors and the escalation in private investment by 12 percent.
The government had set a fiscal deficit target of 3.2 percent of the GDP in 2018. However, volatility in tax collections on account of GST compelled the government to set the target for the year 2021. CRISIL said in its report, The ability of central budgets to prop-up growth is declining with each passing year. The waning impact of demonetization and the ironing out of GST creases will support domestic activity.
Factors affecting the growth rate
According to CRISIL, the extent of the rate of growth depends on four main factors.
The Indian economy has been suffering from the problem of non-performing assets (NPAs) for quite some time now. In order to bring the economy out of this misery, several steps have been taken by the government under the new Insolvency and Bankruptcy Code. Once the lending cycle of the banks gathers momentum, it will stir the components of aggregate demand and contribute to growth.
The governments focus on the creation of employment opportunities in the labour-intensive sectors of the rural areas is also likely to push the growth rate up.
CRISIL also says that proper implementation of reforms like GST and the Real Estate Regulation and Development Act (RERA) and the revision of Ujwal Discom Assurance Yojana (UDAY) will bear fruit and will be instrumental in the economic recovery of the country.
Lastly, the global economy recovered in 2017 but India could not benefit much from it because of the demonetisation and GST shocks. The global growth is expected to continue in 2019 too. This could buoy the exports of the country and further increase growth rate.
While, on one hand, all the aforementioned factors have a chance of contributing to a higher growth rate, there are several factors which could also derail the growth rate. Firstly, the governments inability to resolve GST-related issues might hinder growth. Secondly, if the government cuts back on capital expenditure due to financial stress and if the interest rates are hiked by central banks across the globe, investment will be adversely affected which, in turn, will thwart growth. Finally, higher crude oil prices will increase the cost of production of many goods leading to a rise in the prices of goods. The demand for such goods might be negatively affected, depending on their respective elasticities. In addition to this, certain geopolitical events might also turn out to be an obstruction to growth.