FY17 has been tumultuous for the Indian economy, which had otherwise started on a note of optimism. The incidence of demonetisation has thrown attention off-track with several arguments and counter- arguments being made to decipher the effects of this move. In the last five months, there has been a lot of diversion of attention from the state of the economy with the government trying to argue that the economy was not affected by demonetisation. In fact, there are some votaries who have put forth the view that the economy is better off. Interestingly, even the Budget and post-Budget focus has been more on catching black money than pushing forward the economy. In June 2016, when it looked like that there would be a normal monsoon, it was widely assumed that the economy would move upwards and the government did not rule out 8% growth for FY17, even while the more conservative RBI settled for something half way through the 7-8% mark.
Rural demand and consumption was to provide the impetus accelerated by government spending on infra that would, in turn, bring in more private investment. But the story took a different turn and the final direction is still nebulous. What are the positives for the economy? First, agriculture has been the bright spot on this canvas, and going by the GVA numbers put out by the CSO, growth would be 4.4% as against 0.8% last year. This is to be evenly spread across both the kharif and rabi crops; and for a change, the country is grappling with the problem of surplus production of pulses, which has led to prices coming down well below the MSP.
Second, as a result of the good monsoon and harvest, the CPI inflation has gravitated downwards and from a peak of 6.1% in July has come down to 3.7% in February, which is well within RBI’s radar of 4% with a band of 2% on either side. Third, with inflation being low, RBI has lowered the repo rate twice by a total of 50bps, which is a big push for the industry, especially since the MCLR has also been brought in to ensure better transmission of interest rates. Fourth, the stock market has been buoyant most of the time, and not withstanding Brexit, Donald Trump and demonetisation, will be ending on a high compared with a base of 25,341 in March 2016.
Fifth, the external scenario has changed, though a low base effect has contributed to both exports and imports increasing by 2.5% and 2.3%, respectively, during the first 11 months of the year as against negative growth rates last year. Sixth, a major achievement, for which RBI has to be commended, is on the forex reserves side where an increase of nearly $45 billion was witnessed as they climbed to $364 billion. While the increase is not significant, the achievement was in maintaining this level, notwithstanding the outflow of the FCNR(B) deposits with virtually an un-noticeable impact on the exchange rate.
There are, however, some scars on this painting. The first relates to the GDP growth, which has been projected by the CSO to be 7.1%. While this number looks more sanguine than the substantially lower numbers projected by economists, the fact is that it will be lower than 7.9%, which was attained last year. Considering that FY17 should have been better than last year, it is tempting to conclude that this shaving off growth by 0.8-1% was due to demonetisation as there was nothing else amiss in the economy. The other concern which is now an old story is the investment scene. The Gross Fixed Capital Formation rate has been moving down continuously on a quarterly basis and would be 26.9% this year as against 29.2% last year. Quite clearly, private investment has not yet been inspired and the government’s role has been limited.
While the Centre has been spending close to R2.7 lakh crore in FY17, it is too small a number compared with the GDP number of around R150-160 lakh crore to make a major dent. State governments are grappling with their deficit numbers and are working to adjust with the UDAY debt that has been taken on by most of them. Third, industrial growth, which is reflective of job creation, is still downbeat with growth being just 0.6% in the first 10 months over a low base of 2.7%. The finger points to consumer goods and capital goods which have stagnated. Fourth, bank credit growth has been lacklustre and would be one of the lowest this year at 3.7% till March 2017, compared with 10.5% last year. It would be a big surprise if this number goes beyond 5-6% this year.
Fifth, banks appear to be in a major mess, with the NPA issue still in suspension. While banks are to clean up their books by March 2017, one may have to wait for another quarter as these levels are now close to 9.5% (stressed assets ratio would be higher). The disappointment here is that there is still no clear roadmap of how the government will be addressing this issue for banks in general and capitalising PSBs with the purse strings still being held tight on account of the FRBM rules. Last, while the equity market going by the Sensex has been buoyant, equity issuances have been cautious at just R0.61 lakh crore as against R1.02 lakh crore last year. This is again reflective of low investment activity.
There are some grey patches which do not quite provide a clear indication of the state of affairs. These include the flow of foreign funds. While there has been some hype on FDI flows, the latest balance of payments data shows that for the first nine months of the year total inflows were $33.1 billion as against $33.5 billion—indicating thereby that flows have been stable. FPI inflows were negative this year till January at $3.3 billion, though equity flows were positive at $1.9 billion. Both the interest rate scenario in the US and the quantum of investible funds in developed countries were factors that played in both debt and equity markets.
Further, the exchange rate has been very stable and one of the best performers. While this is good news especially when compared with the situation in FY14, a strong rupee lends a disadvantage to exports. Hence, the good management of the FCNR(B) outflows has resulted in a stronger rupee on the flip side. Last, the government’s stance on the fiscal deficit, though prudent, is indicative that there will not be more money being spent beyond what is mentioned in the Budget. The economy will be entering a new phase in FY18 where it appears all the major pieces on the ‘real economy’ side have to be rethreaded. The positives that have been traversed in FY17 were largely guided by external factors like global environment or monsoon, which have to sing the same tune again to sharpen growth prospects.
The author is chief economist, CARE Ratings. Views are personal.