India is on the Brink of Unmatched Growth; What’s Holding It Back?

Posted by: on Dec 26, 2017 | No Comments

India is on the Brink of Unmatched Growth; What’s Holding It Back

India is an economy whose time has long come. People were yearning for change and emerged with great hope from the shackles of a lethargic and indecisive government. Although progress has been made in the right direction, there are things that are holding us back. But first let’s look at the progress we’ve made recently.

Much to Cheer About

India is gearing up to emerge as the world’s fastest growing economy. According to projections published by the United Nations, the Indian economy is expected to grow at 7.2% in 2018 and 7.4% in 2019. While these growth projections are below the current government’s expectations of 8%, they still mean that India’s GDP growth would be higher than that of China, forecast at 6.5%.

India would have already grabbed the ‘fastest growing economy’ status from China this year, but for the demonetization move, which made our predominantly cash-based economy stutter. And, before we could fully understand the implications of the note ban, we had to contend with the rolling out of GST. These initiatives resulted in India’s GDP growth decelerating to a meagre 5.7%, the lowest growth recorded in 13 quarters.

India’s economy exhibited resilience, and recovered to some extent in the next quarter, with GDP growth accelerating to 6.3%. We’re probably going to end the year with 6.7% growth. That’s something to cheer about.

Bank of America Merrill Lynch has projected India’s GDP growth at 6.5% for 2017-2018, at 7.2% in 2018-2019 and at 7.6% in 2019-2020.

Moody’s is more optimistic than the UN about the Indian economy’s prospects. The US-based credit rating agency indicated that it expects India’s GDP growth to accelerate to ~8% over the next three to four years, projecting economic growth at 7.5% for 2017-2018 and at 7.7% in 2018-2019.

Earlier in November, Moody’s upgraded India’s credit rating to Baa2 from Baa3, noting that continued progress on economic and institutional reforms will boost the country’s growth potential over time.

Morgan Stanley has also released its forecasts for India, with GDP growth projected at 6.4% for 2017, 7.5% for 2018 and 7.7% for 2019. The global financial services firm commented that corporate returns were improving, and that the financial system was strengthening and should meet credit demand.

So, What’s Holding Us Back?

We cannot have enormous amounts of non-performing assets on the balance sheets of various banks and still dream of growing rapidly. These will make it tougher to generate credit for businesses, which is a prerequisite for strong growth.

Growth can be driven by consumption, but only for a short span. Growth has to be driven by flourishing businesses.

The structural reforms being undertaking would prove to be positive over time, but access to credit needs to become a focus, as private investment is key for India’s growth.

Did you know that India’s fixed capital formation as a share of GDP has declined from 40% in 2010 to 30% in 2017? This decline has been felt nationwide, and is not restricted to a particular region. It is a major cause for concern. Focus needs to be on ensuring businesses have easy access to credit and that the cost of borrowing remains low.

These reforms plus moving India to top 10 from top 100 in ease of doing business are needed to make India grow at a pace which can create employment and fulfill Modi’s vision of Make in India.

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