Sustaining India’s Position as Fastest Growing Economy

As India retains the tag of the fastest growing major economy in the world, small improvements are required in critical sectors to ensure economic sustainability.

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Sustaining India's Position as Fastest Growing Economy
India’s Economic Revival should be Sustainable over time

The end of the financial year 2017-18 (FY18) brought back smiles on the faces of Indians, as Central Statistics Office (CSO) estimated a 7.7% GDP growth rate from January to March – highest in the past seven quarters. This remarkable economic growth significantly surpassed China’s GDP growth rate of 6.8% in the same period, reinstating India’s position as the fastest growing major economy in the world. Although the annual GDP growth rate for FY18 was recorded at 6.7%, a four year low, the continuous increment across each quarter has revived optimism among its 13 million citizens for an imminent economic boom.

Riding high on a GDP growth rate of 7.8% in FY16, the cumulative effect of demonetization and goods and services tax (GST) implementation on the Indian economy was catastrophic. While the former hampered cash-incentive industries, the later forced a majority of manufacturing firms to curtail inventories and sales. These briskly enforced major economic reforms played a major hand in slowing down the growth rate to 7.1% in the following fiscal year FY17, with the first quarter (Q1; April to June) of FY18 hitting the trough at 5.6%. Since then, the structural measures of these reforms worked its magic to deliver rich dividends to Indian citizens and gradually increase the GDP growth rate of the country. The following two quarters (Q2 and Q3, FY18) witnessed a growth rate of 6.3% and 7% respectively, with the latest quarter (Q4 FY18) clocking in at 7.7%.

During this period, the meteoric surge in India’s GDP could be attributed to a rapid growth in the manufacturing, construction, and agricultural sectors. The Gross Value Addition (GVA) of the manufacturing and construction sector grew at 9.1% and 11.5% respectively in Q4 FY18, as compared to 6.1% and 3.9% in Q4 FY17. A measure of investment demand, the Gross Fixed Capital Formation (GFCF) swelled to a healthy 14.4% in Q4 from just 1% in Q1 – indicating a return in confidence of private investors post GST implementation. Current Indian Finance Minister, Piyush Goyal, stated that the Indian economy “is on the right track and set for even higher growth in the future”.

Many economists, however, are skeptical regarding the sustainability of the current situation. In addition to private investment, the other three engines necessary for economic growth in India are private consumption, net exports, and government expenditure. Primarily a consumption based economy, private consumption has failed to see an improvement since demonetization – hovering around 57% of the GDP. A majority of Indians are being cautious – refusing to spend money on consumer goods and services that could bolster up the economy. Meanwhile, government expenditure has gone up by 10% each year since FY16. The Indian government has been able to incur the increments primarily due to increase in revenues from GST, thus being able to keep the primary fiscal deficit under 0.2% of GDP for FY18. As oil prices increase at an exponential rate, many economists warn that further increase in government expenditure would escalate the fiscal deficit of the country as well. To sustain its position as the world’s fastest growing economy, India should look forward in boosting its private investment and consumption percentage rather than looking for a payout by the government.

Any countries future is determined by the time over which it sustains a high economic growth. India, backed by major economic reforms in the past years and a turnaround in manufacturing, construction, and private investment, has a chance to build upon its high GDP growth rate in the next decade. A return in consumer confidence is required to mitigate government expenditure and sustain prolonged economic growth.

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