By Richa Gupta & Umang Aggarwal
For the Indian economy, the dominant narrative in the year 2018 was seemingly centred more on external vulnerabilities over domestic resilience. These external vulnerabilities were defined by increased global financial volatility, monetary policy tightening in the US, trade conflicts, and investment re-routing. However, despite seeming vulnerabilities, India emerged as a bright spot on the back of strong macro-fundamentals as well as certain policy changes implemented by the government, some of which included the Insolvency and Bankruptcy Code, bank recapitalisation, and amendments to FDI policy. Against this backdrop, 2018 can be expressed in terms of certain domestic and global events that defined India’s growth path.
GDP and change in composition: Since dropping to 6.5% in FY18, GDP revived in the 7%-plus range over the succeeding quarters on the back of higher consumption and investment activity. However, on the back of 8.2% rise in Q1FY19, GDP has slowed to 7.1% in Q2FY19. One of the reasons for this slowdown may have come from a combination of global events and their trickle-down effect on the domestic economy. Despite the risks, India is likely to mark a GDP growth in the 7.2-7.4% range for the whole of FY19, wherein most of the international growth forecasts for GDP also have remained intact in the 7%-plus range.
What is interesting is the change in composition of this growth. As suggested by the IMF, gross investment as a percentage of GDP is projected to jump from 30.6% in FY18 to 32.2% this year. The expected increase in investment-to-GDP has become increasingly likely given the rising focus on infrastructure and construction projects that can be expected to also bring in incremental foreign flows. This situation seems to suggest that while consumption will likely remain a major driver for GDP growth, investments are likely to add to growth momentum. Crude price fluctuation: The period of higher oil prices corresponded with the period of high inflation, bulge in the imports bill, rising pressure on the current account deficit, and widening of the trade deficit.
Oil prices started to ease since November 2018. With crude prices easing, any hard northward movement in oil prices is unlikely for the remainder of FY19 and oil prices are expected to remain in the $50-60 per barrel comfortable range. A visible impact may come in the form of rupee recovery. Currently, we can see stability in rupee value, as exchange rate has appreciated to Rs 71.6 per dollar as crude oil eased to $65.5 per barrel.
Positive investor sentiment through international recognition: Over the course of the year, India manoeuvred through tough changes becoming the world’s sixth largest in 2017 at $2.6 trillion and is now on its way to become the fifth largest by 2019. Separately, 2018 came with the release of the World Bank’s “Ease of Doing Business” rankings, wherein India jumped another 23 places to reach the 77th rank—marking a cumulative jump of 53 places over the last two years. If the pace of reform implementation remains on track, and business environment is further eased, India can be seen not just as an investment destination, but also as a business hub.
The consecutive increase underlies the government’s structural reforms to ease business regulations, and if this pace is maintained, reaching a spot within the top-50 may be possible. For this, it is critical to undertake speedier and timely implementation of projects that, in turn, would generate a virtuous cycle of growing foreign as well domestic private investment.
Overall, 2018 can be seen as a mixed bag with global risks mitigating some of the domestic resilience. That said, it is easy to notice that India has all the ingredients to create the most compelling growth story of the decade with expected growth in the 7%-plus range, favourable demographic base, increased focus on infrastructure, and a growing consumer market.
Gupta is senior director and senior economist, Aggarwal is economist, Deloitte India