Podcast 22nd May 2015
India is expected to become the fastest growing economy in the world in the next two years, overtaking China as per IMF forecasts. China’s growth has slowed down from double digit levels to levels of around 7% as the country seeks to eliminate issues of over investments, corruption, pollution and bad loans. India’s growth too had slowed down from 9% levels to levels of 5% before bouncing back to levels of 7%, largely on the back of statistical change. Base year of GDP was changed from 2004-05 to 2011-12 and that pulled up growth by a whole 200bps.
Dr. Raghuram Rajan in a recent speech titled, “Going Bust for Growth” spelt out the issues faced by the developed economies in terms of achieving growth. High debt levels at the household and government level has restricted ability to spend on consumption and investment. Below normal economic growth is hampering job creation for the youth as well as causing pain for retirees, who face issues of unfunded pension liabilities and rising costs of healthcare even as their savings earn nothing as headline inflation is almost non existent. Developed economies will struggle for growth even as their central banks pump in unlimited cheap liquidity into the system.
Some parts of the world are torn in wars while others are facing deep economic downturns due to a commodity cycle turning negative.
India’s export growth for fiscal 2014-15 was negative, largely due to weak global economic growth. India is also fiscally constrained to spend on investments as it struggles to lower fiscal deficit that shot up to 6.5% of GDP from levels of 2.5% of GDP post the 2008 financial crisis. Fiscal deficit was at 4% of GDP in fiscal 2014-15 and is targeted at 3% of GDP in fiscal 2017-18.
Domestic consumption is expected to drive India’s growth but consumers are suffering from high inflation that has eaten into their savings. Retail inflation trended at 9.5% levels in the 2010-11 to 2013-14 period before government and RBI took steps to lower the inflation to levels of 5.5%. Fall in economic growth coupled with high inflation has hurt consumer sentiment leading to drop in consumer demand. Consumer durables growth was negative in fiscal years 2013-14 and 2014-15.
Banks appetite to provide credit to the economy has diminished substantially due to accumulation of bad loans. Non Performing Assets and Restructured Assets have grown at a CAGR of 28% to 42% over the last six years. Bank credit growth has fallen sharply from levels of over 20% to levels of below 10%.
India has a long way to go to achieve sustainable GDP growth and that would depend on a host of global and domestic factors turning positive. It still remains to be seen if factors driving India’s growth turns positive.
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