India’s Faltering Demand Conditions

According to the latest national income data of the Central Statistics Office (CSO), India’s GDP (gross domestic product) (at constant 2011–12 prices) grew at a rate of 8.2% in the first quarter of 2018–19 (April–June 2018). This was owing to the strong performance of manufacturing, construction, public administration, defence and other services (PADO), electricity and other utility services, that has not only surpassed policy expectations, but also upheld the position of the Indian economy as one of the fastest growing large economies in the world. This is the highest growth in two years and the strongest since the first quarter of 2016, which reinforces the purported V-shaped recovery and paves the way for steady economic growth for the remaining period of 2018–19. The Monetary Policy Report (October 2018) of the Reserve Bank of India (RBI) also pinpoints the resilience exhibited by the domestic economic activity in recent times, in the midst of an uncertain global environment on account of improvements in services sector and speeding up of industrial activity, primarily supported by firming up of private consumption and investment. Further, it states that these two components have underpinned the strengthening of aggregate demand conditions in the economy in the recent months, which have not only raised the real investment activity on a durable basis, but also resulted in a sharp acceleration in the manufacturing sector, thereby expanding the aggregate supply side of the economy. However, this short period of above-trend growth fails to capture the prolonged period of low and unstable below-trend growth rates over the past few years that has not only dampened the various components of aggregate demand and supply, but has also spawned the deflationary impulses weighing on an economy that is yet to gather its full momentum. It must be emphasised that these growth numbers come on a low base of several quarters of poor growth, wherein the recent growth rates of high frequency indicators are notably lower than what they were during the high-growth period. When one analyses the extended statistics, it not only paints an ailing picture of the Indian economy, but also corroborates the slowing growth rate trend of the preceding years.

This year’s Economic Survey presents a rather optimistic view about the economy. Considering lower inflation, improved current account balance and notable reduction in the fiscal deficit to GDP ratio, there is growing confidence in India’s macroeconomic stability over the medium term. The survey asserts that economic growth improved as the shocks from the goods and services tax (GST) and demonetisation began to fade. This is reflected in the enhanced business climate, increased ranking in the ease of doing business index and upgraded sovereign ratings, which have not only brightened the medium-term growth prospects, but also validated this growth. Nevertheless, despite major policy reforms such as the introduction of GST, resolution of problems associated with non-performing assets (NPAs) of banks and further liberalisation of foreign direct investment (FDI), the slackening of aggregate demand continues due to languishing investment and a sharp rise in trade deficit. Private consumption demand, which had been the fulcrum of overall demand in the economy, has started to lose momentum, whereas gross fixed capital formation (GFCF) does not show any definite signs of a warranted reversal. Also, had it not been for the front-loading of public spending that boosted government consumption, the deceleration in economic activity would have been even more pronounced. Although factors such as sales growth, a pickup in capacity utilisation, acceleration in the fast-moving consumer goods (FMCGs) sector and bounce back in merchandise exports have strengthened in 2017–18, deflationary tendencies continue to exert a drag on the Indian economy. These include transitional frictions from implementation of the GST, fiscal tightening by the centre and states due to budget overruns, and the exacerbating twin balance sheet (TBS) challenge that has resulted in the declining profitability of core sectors as well as the deteriorating financial situation of stressed firms and banks. Under these circumstances, the nascent recovery can only be labelled as lukewarm, rather than V-shaped. Furthermore, growing protectionist tendencies in some countries and higher international oil prices since the last few quarters have not only raised vulnerabilities, but also threaten macroeconomic stability in the forthcoming period.