The global economy has been growing at a steady pace over the last few years and is expected to post robust growth during the 2018-19 period. The Indian economy is also expected to exhibit strong growth fundamentals with growth rates pegged at 7.3% and 7.4% for 2018 and 2019 respectively, as per International Monetary Fund’s World Economic Outlook October 2018 report.
Having reached a Gross Domestic Product (GDP) of US$ 2.7 trillion, the Indian economy is currently at an inflection point and is now aiming to become a US$ 5 trillion economy by 2025-26. With this backdrop, the article looks at the recent economic developments and various reforms undertaken for bolstering the growth of the Indian economy.
Indian Economic Outlook
Despite a slowdown in the pace of growth amidst global uncertainties, growth prospects for the Indian economy are expected to improve, given a favorable demographic dividend and continued structural reforms. Undeterred by a dip in recent economic activity, India retains the tag of the fastest growing major economy in the world during 2018-19.
As per latest data from the Central Statistical Organization (CSO), economic activity eased to 7.1 % in the second quarter of 2018-19, compared to 6.3% recorded in the same quarter last year and in contrast to an expansion of 8.2% recorded in the first quarter of the same year. Several factors including rising crude oil prices, the depreciation of the rupee and a moderation of agricultural activity at 3.8% could have caused the slowdown. Industrial growth and services growth remained steady at 6.5% and 7.5 % respectively. Full year growth is expected to be broadly on target at 7.4% in FY 2019, as per a projection by Reserve Bank of India (RBI).
The Index of Industrial Production (IIP) in the month of October 2018 recorded a growth of 8.1% as compared to the level in the month of October 2017 – displaying the fastest pace of industrial growth in almost a year.
The indices for mining, manufacturing and electricity sectors for October 2018 recorded strong growth rates of 7%, 7.9% and 10.8% respectively, brightening the prospects for the economy. Cumulative growth recorded by these three sectors during April-October 2018 over the corresponding period last year stood at 3.8%, 5.6% and 6.8% respectively.
Twenty out of the twenty-three industry groups (as per 2-digit NIC-2008) in the manufacturing sector grew positively during the month of October 2018 as compared to the corresponding month of 2017.
The top three industry groups with highest growth rates included ‘Manufacture of furniture’, which grew at 41%, followed by ‘Manufacture of wood and products of wood and cork except furniture; manufacture of articles of straw
and plaiting materials’ at 39%, and ‘Manufacture of computer, electronic and optical products’ at 30.2%.
Output of Eight Core Industries
The eight core industries account for more than 40% of the weight of items included in the IIP. In October 2018, the combined index of eight core industries stood at 134.8, registering an increase of 4.8% over the value of the index in October 2017. The index posted a cumulative growth of 5.4% during April-October 2018.
The pick-up in growth was primarily led by sharp improvements in the output of cement at 18.4%, electricity at 11.4% and coal at 10.6%, recorded during October 2018. Steel and refinery products growth moderated at 2.2% and 1.3% respectively.
On the other hand, sectors such as crude oil, natural gas and fertilizers recorded contractions at (-) 5%, (-) 0.9% and (-) 11.5 % respectively.
Retail inflation based on the Consumer Price Index (CPI) declined to a one and a half year low of 2.33 % as per the newly released figures by CSO in the month of November 2018. The decline was mainly on account of lower food price inflation of kitchen essentials such as vegetables, eggs and pulses. Retail inflation stood at 4.88 % in November 2017.
On the other hand, wholesale price inflation (WPI) surged to 5.3% in October, up from 5.1% in September. The increase in WPI was brought about by dearer price of fuel and manufactured products while retail inflation eased due to cheaper food items including fruits, vegetables, cereals and milk products. However, WPI fell to a three month of low of 4.6 % in the month of November, driven by lower prices of food articles including vegetables and certain petro products.
India’s overall exports (including services) are estimated to be US$ 308.32 billion during the April-October 2018-19 period, exhibiting a positive growth of 17.17%, over the same period, last year.
Indian merchandise exports also grew positively during October 2018. Exports in October 2018 stood at US$ 26.98 billion in contrast to US$ 22.89 billion in October 2017, recording a year-on-year growth of more than 17.8%, as opposed to a contraction of 2.2% in the previous month.
Major commodity groups of export showing positive growth included petroleum products, organic and inorganic chemicals and drugs and pharmaceuticals.
Non-petroleum and non-gems jewellery exports grew positively at a rate of 14.54% between October 2017-18.
Total imports also improved from US$ 37.50 billion in October 2017 to US$ 44.11 billion in October 2018, recording a 17.62% increase year-on-year.
Imports were primarily led by the major commodity groups of petroleum, crude and products, electronic goods and organic and inorganic chemicals.
Growth in imports was mainly driven by oil imports, which increased by more than 56% in October as global Brent prices increased by around 40% compared to last year. On the other hand, non-oil imports grew at a much slower pace of 6.1%, owing to a sharp fall in gold imports, which fell by more than 42%.
Increased imports led to a widening of the trade deficit, which stood at US$ 17.13 billion in October 2018 as against the trade deficit of US$ 14.61 billion in October 2017.
Current Account Deficit
India’s Current Account Deficit (CAD) or the difference between the outflow and inflow of foreign exchange in the current account, increased to US$ 19.1 billion (2.9% of GDP) in Q2 of 2018-19 as compared to US$ 6.9 billion (1.1% of GDP) in Q2 of 2017-18 and US$ 15.9 billion (2.4% of GDP) in the preceding quarter.
The CAD widened primarily on account of a higher trade deficit at US$ 50 billion as compared with US$ 32.5 billion a year ago.
In the financial account, net Foreign Direct Investment (FDI) moderated to US$ 7.9 billion in Q2 of 2018-19 from US$ 12.4 billion in Q2 of 2017-18.
Net services receipts increased by 10.2% on a year-on-year basis from a rise in net earnings from software and financial services. Private transfer receipts, representing remittances by Indians employed overseas also increased by 19.8%.
India’s total fiscal deficit, i.e. the difference between total expenditure and total receipts, stood at Rs. 6.0 trillion (US$ 84 billion) during April-September 2018 which was 95.3% of the budget estimate – 4 percentage points higher than the deficit during the same period, last year which stood at 91.3% of the budget estimate.
Total expenditure incurred during April-September 2018 stood at Rs.13.1 trillion (US$ 183.4 billion), at 53.4% of the budget estimate, almost the same percentage from a year ago.
Total receipts declined to Rs.7.1 trillion (US$ 99.4 billion) in April-September 2018, at 39% of the budget estimate from 40.6% during the same period last year.
India’s total fiscal deficit stood at 3.5% of GDP during 2017-18 and is targeted at 3.3 % of GDP in 2018-19.
A critical requirement for driving manufacturing growth and inviting more investments in the country is a business-friendly environment. This year, India’s performance stands out in the World Bank’s Doing Business rankings, where the country leapfrogged 23 places from last year to reach the 77th rank, among 190 economies. India was also one of the top ten improved economies in the areas of doing business, for a second consecutive year.
India has achieved huge progress over the last four years in terms of improving its rank in the Ease of Doing Business (EoDB) indicators, wherein India’s ranking improved from 142 in 2014 to 77 in 2018 – a remarkable improvement of 65 places. This was a result of continued and effective EoDB reforms.
Logistics Performance Index
India ranks 44, among 160 countries in the Logistics Performance Index, compiled by the World Bank. The index ranks countries across six dimensions of trade logistics such as, efficiency of clearances, quality of trade and transport related infrastructure, competence and quality of logistics services, among others.
India performed reasonably well in the areas of timeliness, tracking and tracing consignments and international shipments. However, it needs to step up its performance in the areas of customs and infrastructure.
Global Competitiveness Index
The World Economic Forum (WEF) compiles the Global Competitiveness Index for ranking countries in terms of the drivers of long-term competitiveness, using indicators that drive productivity and growth.
India ranked 58 among 140 countries in the world in the Global Competitiveness Index of 2018. While this was below its rank last year, this was a result of a change in the methodology with inclusion of new factors, as per WEF. The new rank is equivalent to a jump in 5 places with the methodology adopted in 2017, indicating an overall improvement for India, which is home to the third largest market in the world, after China and the US.
Global Innovation Index
India was ranked the 57th most innovative country in the world, an improvement by 3 places from its position of 60 last year, as per the 2018 Global Innovation Report, brought out jointly by Cornell University, INSEAD and the World Intellectual Property Organization (WIPO).
India is the most innovative country among its central and southern Asian counterparts and top performer among the lower middle-income economies, occupying the 5th rank.
Over the last five years, India has steadily improved its rank from 76 in 2014 to 57 in 2018, proving itself to be one of the world’s rising innovation centres.
Over the last few years, a slew of reforms has been undertaken by the Government to give a strong boost to India’s growth. Some of the recent and significant reforms are outlined below.
Goods and Services Tax (GST)
On 1st of July 2017, India, in a historic move, introduced the Goods and Services Tax (GST), hailed as one of the most transformative and ambitious tax reforms, since India’s independence. GST aimed to create a unified national market by amalgamating several central and state taxes into a single tax regime.
India has come a long way in greatly improving and simplifying its tax regime since the introduction of GST in 2017. The Government has been very proactive in addressing industry concerns related to GST.
Recent initiatives include the postponement of GSTR 9, 9A and 9C forms from December 2018 to March 2019, which was a key request. The GST Council, a unique forum of state finance ministers chaired by the Union Finance Minister, has been also very responsive in taking up other issues such as the smooth flow of input tax credit, rationalizing tax rates for certain items including processed foods and consumer durables, and so on.
Additionally, the relief provided to small enterprises with turnover up to Rs. 1.5 crore (US$ 0.21 million) in terms of filing of quarterly returns and deferment of Reverse Charge Mechanism on purchases by registered dealers from unregistered dealers has also been a welcome move.
Ease of Doing Business
India’s performance in Ease of Doing Business has been remarkable over the last few years, with India jumping 23 places to occupy the 77th rank in the 2019 World Bank’s Doing Business Indicators.
The improvement came on account of a substantial improvement in the Distance to Frontier (DTF) score that measures the gap of an economy to the global best practice. The score improved consistently from 56.05 in 2017 to 60.76 in 2018 to 67.23 in 2019, with a higher score reflecting a country’s improved regulatory performance.
India’s sharpest improvement in ranking was in the case of dealing with construction permits where it moved up 29 spots, followed by trading across borders and starting a business, where it moved up 66 spots and 19 spots, respectively.
India also ranks among the top 25 in the world in terms of protecting minority investors, getting credit and getting electricity.
Recent reforms which have ushered in the improvement in India’s score include introduction of single joint inspection instead of multiple ones, simplification of procedures including electronic incorporation of companies, common registration facility for EPFO and ESIC websites and online procedures for issuing GST registrations.
Foreign Direct Investment
Foreign Direct Investment (FDI) is a critical factor that can strengthen the economy by bolstering economic growth and development.
Since the liberalization reforms in 1991, the Government has taken regular reforms and measures to ease FDI restrictions for the country’s better integration with the world economy. Today, FDI policy covers 100% permission under the automatic route for most sectors, with a small negative list, making India one of the most open economies in the world.
Some of the recent reforms include permitting 100% foreign investment in sectors such as construction development, railway manufacturing, and the manufacture of medical devices.
Other major reforms include 100 % FDI in single brand retail under the automatic route, up to 74% FDI in existing pharmaceutical industry and allowance of investments by foreign airlines up to 49% under approval route in Air India.
FDI limit in the defence sector has also been increased beyond 49% and up to 100% through the approval route for cases providing access to modern technology. FDI limit in the insurance sector has also been increased to 49% from the previous 26%, under the automatic route.
Other measures include permitting investments by foreign institutional investors or foreign portfolio investors in power exchanges through primary market; foreign investments in Alternate Investment Funds; no requirement of prior approval by the Government for FDI up to 100% in real estate broking services and permitting investments by foreign venture capital investors in the infrastructure sector as well as in start-ups engaged in any sector.
These reforms coupled with India’s progress in EoDB, the enactment of the Insolvency and Bankruptcy Code, and the introduction of GST among others, would usher in greater FDI to the country, boosting technology development and spurring economic growth.
Trade facilitation is a topmost priority of the Government and several provisions and measures have been taken to promote the same.
Some of these measures include the facility of 24*7 customs clearance at all major ports, the inauguration of a fourth container terminal with a capacity of 24 lakh containers at Jawaharlal Nehru Port Trust, provisions of direct port delivery and direct port entry at major ports, among others.
To strengthen the Risk Management System, the Central Board of Indirect Taxes & Customs (CBIC) has implemented electronic sealing for containers by exporters under self-sealing procedure.
e-Sanchit, the online application that allows a trader to electronically submit documents for clearance with digital signatures has been made mandatory in imports on all Customs Electronic Data Interchange (EDI) locations in the country.
Further, e-Delivery order, e-Invoice and e-Payment have been made mandatory by all stakeholders in maritime trade.
Insolvency and Bankruptcy Code
The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 has been one of the biggest and most effective reforms to resolve India’s non-performing assets (NPA) problem.
Within a year of its enactment, new networks of the National Company Law Tribunal (NCLT), the new regulator ‘Insolvency and Bankruptcy Board of India (IBBI), new stream of ‘Insolvency Professionals’ along with new stream of ‘Insolvency Professional Agencies’ were in place to boost the infrastructure to support IBC.
Since its introduction, constant updates and improvements to IBC have followed based on feedback received and from practical experience learned from the process of execution. Exits from failing businesses has been made easier.
Make in India
India’s recent export performance was commendable given the pickup in exports growth during the April-October period in 2018-19, which grew by more than 17% during the same period, last year. Services exports also expanded and have gone up by as much as 24% in the first half of the year, to reach US$ 117 billion.
The country has progressed substantially under the Make in India program which aims to build the best in class manufacturing infrastructure in the country by facilitating investments, nurturing innovation and research and development, promoting skill development initiatives and creating a business-friendly environment.
The Make in India scheme has continually worked towards boosting and enhancing Indian exports. This has resulted in significant increase in mobile phone production and has helped India become the second largest manufacturer of mobile phones in the world.
On the agricultural front, the Government has taken a series of significant steps to boost market operations.
In just over 2 and a half years, substantial progress has been achieved in terms of facilitating trade operations through the online trading portal, known as the National Agricultural Market or the e-NAM portal. The e-NAM currently encompasses 585 mandis across 16 states and 2 UTs. Till date, the portal has registered 73.5 lakh farmers, 1.01 lakh traders and 53,163 commission agents with a total traded value of Rs. 36,275 crores (US$ 5.1 billion) from the trading of Rs.1.52 crore (US$ 0.21 billion) tonne of produce.
The Government has announced tax benefits to Farmer Producer Organizations, brought out a Model Land Leasing Act to encourage states to go for land leasing and expand private sector participation. The Ease of Doing Agriculture Business ranking for states is being introduced to help states work on a conducive agricultural environment.
Other initiatives include the upgradation of 22,000 rural haats to Grameen Agri markets, for which CII is working on pilot projects; setting up of mega food parks for giving an impetus to food processing, among others.
The Indian economy can be expected to show further improvements backed by robust macroeconomic fundamentals such as strong GDP and industrial growth, and a stable inflation regime. India has also made further strides in greatly improving its business environment and its innovative capacity. However, concerted efforts must be in place to address concerns in areas such as improving trade fundamentals, reducing CAD and maintaining fiscal deficit targets.
The Indian economy is on a rebound as it has recovered from transitory adjustments such as the Goods and Services Tax. Backed by strong and continued reforms and a rich demographic dividend, India is expected to continue its journey on an upward growth trajectory.