Where is the Indian Economy Headed in 2019?

Posted by: on Jan 11, 2019 | No Comments


With major publications, including Forbes, warning of a coming recession in 2019, the ancient Chinese curse seems to be coming true – May you live in interesting times. And, what an interesting time it is especially for India, given that all predictions point to the economy growing at the fastest pace, overtaking China in 2019. In fact, a recent article on The Economic Times stated that India economic growth is likely to be such that it might just dethrone the UK as the world’s fifth largest economy. Of course, the journey is likely to be far from smooth, especially with the general elections looming large.

What Leading Analysts Say

India is expected to continue on its rapid growth path, outstripping China with a growth rate o 7.3% in 2018-19 and 7.6% in 2019-20, according to Asian Development Bank, in an article by NDTV Profit. Moody’s seems to agree with this prediction, forecasting on its part that the India is likely to grow at about 7.5% through 2018 and 2019, given that the economy is “largely resilient to external pressures,” such as those from rising oil prices, says Business Today.

In its Global Macro Outlook report for 2018-19, Moody’s explained that the rising energy prices would raise headline inflation, but only temporarily, without impacting the growth story. The growth is expected to be driven by strong rural and urban demand, as well as an improvement in industrial activity. Investments and private consumption are also likely to rise, spurring growth. In fact, the International Monetary Fund (IMF), in its latest report termed India’s near-term macro-economic outlook as “broadly favourable.”

What the IMF Says

Here’s a deeper dive into what the IMF report had to say about India.

Firstly, the IMF expects India’s GDP growth to rise from 7.3% in 2018-19 to 7.5% in 2019-20. Economic growth is expected to continue at a pace faster than almost every other nation in the world. This is good news at a time when many experts are making almost doomsday prophecies for the biggest economies, such as the US, China and the post-Brexit UK.

The report goes on to explain that the factors driving India’s growth are interesting, given that gross investment, as a percentage of the nation’s GDP, is expected to surge from 30.6% in FY2018 to 32.2% in FY2019. The IMF views the rise in investment demand as a positive indicator, since it also signals that consumption will continue to rise as well, driving growth.

Associated with this is the forecast that savings, again as a percentage of the GDP, will also increase, although not as steeply as investment. In fact, the savings-to-GDP ratio is expected to be lower than that seen in 2016-17. While the reasons for this is still unclear, the imbalance between investment and savings could lead to a rise in the current account deficit, which the IMF pegs at 2.6% of the GDP for 2019-20.

In addition, foreign direct investments are expected to rebound, following the decline in the last fiscal year. However, net portfolio inflows are forecasted to be significantly lower, which is worrying for the capital markets. On the other hand, economic growth will spur money supply, which could rise as much as 11.4% in FY19. Such growth was last seen in FY13.

Another positive comes in the form of rising bank credit for the private sector, which is pegged to grow by 13.6%. All this growth is likely to drive consumer price inflation up by an average 5.2%, much higher than the RBI’s target of 4%. This means that the central bank might need to tighten its monetary policy in 2019.

There are Some Challenges

As mentioned in the beginning, while the near-future might seem bright, there are some challenges too. For instance, the rising oil prices worldwide, concerns regarding the global financial scenario, the general elections in May and more.

So, are the analysts being too optimistic about India’s growth in 2019? Only time will tell.

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