Despite FY18’s low base, a 7.3% growth is a bit of an ask
The fact that the IMF hasn’t upped its forecast for 2018-19 from 7.3% is bad news because one would have expected a bigger bounce in the economy after the disruption from demonetisation and the GST. There is little to cheer in a 7.3% number because it will come off a very low base of 6.7% in 2017-18. Even this is something of an ask and the IMF has hedged itself, saying the risks are tilted to the downside, thanks to higher global oil prices, tighter global financial conditions and domestic financial vulnerabilities. One could add an additional risk: a deficient monsoon in key regions which could result in lower-than-expected food production, and which could depress rural consumption.
If the gross investment as a share of the GDP goes up to 32.2% from 30.6% last year, as the IMF believes it will on “strengthening ‘investments”, that would be good news since, four months into the current year, there are few signs of investments picking up. The management commentary from Larsen & Toubro, a bellwether for gauging investment trends, suggests the private sector has virtually no immediate plans to add manufacturing capacity and may not do so for a couple of years. As for the government, it is unlikely to be able to spend more than it has penciled into its budget, given it will want to reserve resources for MSP and other welfare-schemes ahead of the elections.
The IMF believes consumption will be “‘robust” but private final consumption expenditure (PFCE) has clocked in a sub-7% growth for five straight quarters till Q4FY18; growth was 6.7% in Q4FY18, but that came off a very weak base of 3.4%. To be sure, there is a lot more cash in the system now, and the government will work to put money in the hands of rural India ahead of the elections. Where the IMF seems overly optimistic is in its assessment of India’s export performance because it believes the growth in merchandise exports will be a strong 13.2% this fiscal year. Again, there is a long and huge base effect since 2011-12; in three of the years since then and 2017-18, merchandise exports were negative. But, given the tariff wars and the increase in dumping due to this, a 13%-plus growth looks highly unlikely.If one were to gauge how the economy is faring right now by looking at the loan growth, it isn’t too encouraging; non-food credit disbursed by banks is averaging 12 -13% y-o-y—on a low base—with most of the lending taking place in the retail segment. Interest rates are heading up—thanks to higher inflation—and that will probably slow the pace of lending, especially by non-bank financial companies whose cost of funds is bound to go up.