Looking back, it is clear that the Indian economy is staging a second recovery in the past six years. However, the lingering question is about the strength of the latest recovery. As is evident from Charts 1 and 2, both gross value added and gross domestic product seem to be getting closer to the recent peaks achieved in FY16. However, unlike the Reserve Bank of India, which reiterated its forecast of 7.4 per cent GDP growth in FY19, India Ratings and Research has dialled down its expectation to 7.2 per cent (Chart 2).
Chart 3 shows that, in terms of sectors of production, while services are still adding value at over 8 per cent, yet both industry and agriculture are falling behind on expectations. Chart 4 shows the story from the expenditure side. It is a welcome development that the growth rate of private consumption expenditure is recovering sharply, suggesting an end of demonetisation’s woes, yet the tepid recovery in gross fixed capital formation, or investment expenditure, suggests the recovery is not as broad-based as it should be.
Chart 5 shows one of the main reasons why Ind-Ra expects slower growth this year: average retail inflation in FY19 is higher (4.6 per cent) than expected (4.3 per cent). In response, the interest rates are tightening (Chart 6). A related concern is the government’s fiscal deficit, which is expected to be the lowest in recent years (Chart 7) but with many upside risks. What does not help matters is that despite more exports, the current account deficit is likely to widen (Chart 8) as imports grow even faster, coupled with lower growth in invisibles. The rupee’s depreciation (Chart 9) further aggravates this trend.
Source: Reserve Bank of India’s Financial Stability Report, June 2018; Compiled by BS Research Bureau
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