India was the world's fastest growing economy for first 3 months of 2018, but there’s a catch
- India’s economy grew by 7.7% in the quarter that ended on March 2018, the highest rate in seven quarters.
- However, a major reason for this growth is due to the fact that the quarter was measured against the same quarter in 2017, when growth fell to 6.1% because of demonetisation.
- India’s overall growth rate for 2017-18 came in at 6.7%, just a shade above original estimates of 6.6%
A day after Moody’s downgraded its forecast for India’s growth in the current fiscal year to 7.3% from 7.5%, India’s
With a growth of 7.7% in the three months that ended 31 March, India recorded its highest growth rate in seven quarters and retained the title of the world’s fastest growing economy from China, which grew by 6.8% in the same period.
This also marked a significant rebound from the first quarter of fiscal 2018, when the growth rate plummeted to 5.7%. The strong growth was largely a combination of three factors - a pickup in manufacturing, construction and agriculture.
A welcome development, but hardly a game-changer
After months of bad news, rising oil prices, outflows of foreign funds and depressed expectations of the economy, the figures were a welcome development.
However, a major reason for this growth is due to way quarterly growth rates are calculated. Quarterly growth in any given year is measured against the gross production figures in the same quarter of the previous year.
The last quarter of 2017-18 had the fortunate distinction of being measured against the first three months of 2017 - the quarter that followed the government’s demonetisation announcement. Growth in the last quarter of 2016-17 fell to 6.1% as consumption declined and businesses, especially SMEs, grappled with the effects of demonetisation.
Additionally, the news has no bearing on India’s growth in the current fiscal year, which will likely take a hit as oil prices increase further, the current account deficit worsens and lending to businesses remain sluggish.
Further still, India’s overall growth rate for 2017-18 came in at 6.7%, just a shade above original estimates of 6.6%. So, the strong growth in the last quarter didn’t change the big picture much. The overall growth rate was still the lowest annual growth in
AdvertisementFiscal deficit in control
India’s growth in the last quarter of 2017-18 was also lifted by a 14.7% rise in the central government’s expenditure, partly owing to higher spending on defence and public services.
However, the government still managed to roughly satisfy its fiscal deficit target of 3.5% of GDP. The fiscal deficit, or the difference between government expenditure and revenues, came in at ₹5.92 trillion, just a inch over 3.5% of the GDP. It was helped in this regard by a dividend handout from the
The target was increased from 3.2% of GDP earlier this year by Finance Minister Arun
AdvertisementIndia’s year-end growth figures will likely give the RBI the confidence it needs to increase interest rates when its monetary policy committee meets next week. The rise in oil prices has led to an increase in inflation, while foreign funds have left the country in search of higher and safer returns elsewhere. A hike in interest rates will prevent a further increase in outflows and could even help stem the rupee’s depreciation.
The RBI decided to keep interest rates on hold at its last meeting in April due to concerns over India’s growth and expectations that the inflation rate would decline. Now, with rebounding growth, improving demand and rising prices, it will strongly consider a rate hike.
As things stand, however, India’s economy is still not in the clear. A number of serious headwinds loom in the short-term. It will be interesting to see what India’s growth rate in the first quarter of fiscal 2019 ends up being. Given that the growth rate in the first quarter of fiscal 2018 fell to a three-year low of 5.7%, however, the growth rate in the current quarter will likely exceed expectations.
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