New Delhi: India’s gross domestic product (GDP) increased by 7.2% in the October-December 2017 quarter, showing a sustained pick-up in growth recovery in an economy that was hit hard by issues related to the roll-out of the Goods and Services Tax (GST) and lingering impact of demonetisation.
However, exploding bad loan crisis of the banking sector could scare investors off and throw a wrench in this growth recovery, economists have warned.
“Foreign investors would like to know how India is going to address its non-performing asset (NPA) crisis before they invest,” NR Bhanumurthy, former director, National Institute of Public Finance and Policy (NIPFP), told The Wire. As a consequence, appetite for large-sized projects could suffer.
Bhanumurthy said banks could turn cautious about financing large-sized projects and tighten their loan appraisal norms. Corporates too could become risk averse.
Flagging upside potential, he added that agriculture and construction sector could surprise with higher than expected growth. The NIPFP professor said that the economic recovery was broad-based.
The economic growth plunged to 5.7% in April-June quarter, the lowest in three years, but recovered to 6.5% in July-September period.
As per national income data released by the Central Statistical Office (CSO) on Wednesday, the Indian economy will grow by 6.6% in the fiscal 2017-18, down from 7.1% in the 2016-17.
Earlier, the CSO had estimated GDP growth for 2017-18 at 6.5% in the first estimate. Gross value added (GVA) may grow by 6.4% in 2017- 18, lower than 7.1% in 2016-17.
During the quarter under review, GVA for manufacturing grew at 8.9%, up from 6.9% in the previous quarter. Similarly, the farm sector GVA grew at 4.1% as against 2.7% in the previous quarter. The construction sector recorded a robust growth of 6.8%, higher than 2.8% in previous quarter. The services segment including financial services grew at rate of 6.7%, higher than 6.4% in previous quarter.
A 12.0% growth in fixed capital formation pulled up GDP growth, said Devendra Pant, chief economist, India Ratings and Research.
How we can nurture this budding investment revival with conducive policies is the question, he added. Pant also expressed concern over the decline in private consumption during the quarter under review.
“An area of concern is decline in private consumption growth to 5.6% in 3Q FY’18 from 6.6% in 2Q’FY18,” he said.
From supply side, some of the sectors that standout are agriculture, construction and manufacturing. Construction and manufacturing sector GVA growth is in line with IIP and core infrastructure industries growth, the India Rating chief economist said.
Wednesday’s growth figure will not change expectations for monetary policy, however. Most analysts still anticipate the Reserve Bank of India (RBI), which is balancing concern with inflation and support for growth, to hold interest rates at its next policy meeting on April 5.
“RBI has to balance between growth and inflation. The recently released minutes of the MPC’s last policy meeting showed growing concerns of embers over continued inflationary risks arising from high food and crude prices,” Gandhi said.
The GDP data could help Prime Minister Narendra Modi, who faces criticism over mounting bad loans at state banks and a $1.77-billion fraud at state lender Punjab National Bank, the biggest in the country’s banking history.
Last week, Modi told industrialists that his government, which has a “twin balance sheet” problem resulting from bad debt in banks and many businesses, was determined to put the economy back on a higher growth trajectory.
Modi is trying to accelerate growth through higher state spending, including 2.1 trillion rupees ($32.36 billion) for recapitalisation of state banks, which are beset with mounting bad loans of nearly $148 billion.
He has stepped up spending on infrastructure and welfare projects to boost growth ahead of national elections in 2019.
This has widened the fiscal deficit for the current fiscal year, ending in March, to 3.5 percent of GDP, instead of the figure of 3.2 percent projected earlier.
(With inputs from Reuters)