It is hoped that the Indian Economy will witness an improved performance with faster growth in FY18 with the impact of demonetization largely believed to be behind us. Further, growth in the domestic economy is expected to be propelled by favourable monsoons, relatively higher consumption demand, increased government spending on infra and a recovery in private investments, says Care Ratings.
According to it “Global economic conditions too have been supportive thus far with economic growth strengthening, albeit at a gradual pace, in the key advanced economies and some emerging economies alike. Hence, global growth prospects appear positive although political risks continue to prevail.
A review of the economic performance in the first quarter of the fiscal presents a mixed picture. While on some counts such as foreign inflows, currency, forex reserves, industrial output, inflation the performance has been encouraging to positive, for many indicators such as borrowings and trade balances there has not been a noteworthy improvement so far. This, in turn, leads to conclusions that the hoped for broad-based recovery is yet to materialize in a meaningful manner.
Uptick in Industrial output
There has been favorable growth in industrial output at the start of fiscal, indicative of a likely pickup in industrial growth. The industrial output as given by the Index of Industrial Output (IIP) in Apr’17, although lower than the 6.5% recorded in the corresponding month a year ago, surpassed market expectation to grow by 3.1% despite the high base effect. IIP grew at an average 2.8% in the preceding 4 months.
The growth across the various segments of IIP in Apr’17 has been mixed with negative growth in capital good and consumer durable goods and favorable growth in case of infrastructure and intermediate goods. Increased government spending has been pushing overall industrial output.
The performance of the 8 core industries, which account for nearly 38% of the IIP, has seen an improvement in May’17 to 3.6% from 2.7% in Apr’17. The growth of 3.2% in core sector in the Apr-May’17, is lower than the 6.9% growth during the corresponding period last year (growth in this period benefitted from the low base effect).
Steel and electricity output has seen a favorable growth this fiscal, with the former being linked to higher government infra spending which started from April 1st as well as corrective action on steel imports taken last year.
Industrial output, believes Care Ratings, is slated to improve this fiscal with improvement in demand across segments aided by increased government spending and consumer spending on the back of good monsoons and with pent-up demand (from demonetization) and fresh demand (with 7th Pay Commission) coming into the markets.
“We expect the industrial output to grow in the range of 5-6% in FY18”, says the rating agency.
Going forward, Care believes, although prospects for the Indian economy appear favorable the critical factors to watch out for in coming months would be:
– Impact of GST. The time taken by various sectors and businesses to sort out the initial implementation issues would have a bearing on the overall level and pace of economic activity.
– The resolution of the NPA problem which will have a bearing on the ability of banks to increase lending when demand picks up in the second half of the year.
– Global developments on interest rate action especially by the Fed which will drive foreign flows.
– RBI action on interest rates. We expect a rate cut by 25 bps in October.
– Pick-up in private investment – there has been exhaustion of inventories due to the GST announcement which should lead to higher capacity utilization in future and investment at the second stage.
Care Ratings expects the Indian economy to grow by 7.6-7.8% in FY18.