Sluggish growth alert

The NCAER, the country's oldest non-profit economic policy research institute, has forecast that the Indian economy will grow at a sluggish 6.2 per cent this year.

By Jayanta Roy Chowdhury
  • Published 15.11.17

New Delhi: The NCAER, the country's oldest non-profit economic policy research institute, has forecast that the Indian economy will grow at a sluggish 6.2 per cent this year.

The NCAER forecast, which was made in its mid-year review of the Indian Economy, is lower than the IMF forecast of 6.7 per cent that was made last month. The IMF had trimmed its forecast from its earlier level of 7.2 per cent.

Last month, the Reserve Bank of India had also lowered its growth forecast - based on gross value added (GVA) which strips out the effect of product taxes and subsidies - to 6.7 per cent.

The Indian economy had grown by 7.1 per cent in 2016-17 - and a decline from that level will buttress the argument of the Modi government's critics that the double whammy of demonetisation and a hastily-introduced goods and services tax has hollowed out the Indian economy.

Economists such as Prof. M. Govinda Rao, former Member of the Prime Minister's Economic Advisory Council, Pronab Sen, former chairman of the National Statistical Commission, and Prof. Biswajit Dhar, of the Jawaharlal Nehru University, polled earlier by The Telegraph, had forecast a GDP growth between 6 and 6.5 per cent for 2017-18.

However, N.R. Bhanumurthy of the government-funded Institute of Economic Growth has taken a contrarian view and projects a growth rate of 7 per cent this year.

Growth in the first quarter (April-June) slumped to 5.7 per cent, the lowest level in three years, which prompted the opposition parties to slam the Modi government for wrecking an economy that had pipped China to become the fastest-growing major economy in the world just over a year ago. It has since conceded the bragging rights to China.

GDP figures for the second quarter are expected later this month and could help corroborate the gloomy picture painted by NCAER, said officials.

Finance ministry officials said it was unlikely for "GDP growth rate in the second quarter to be significantly higher ... it may be in the range of 6-6.5 per cent."

NCAER said real agriculture GVA is forecast to grow at 3 per cent, real industry GVA at 4.5 per cent and real services GVA at 7.6 per cent in 2017-18. These figures were calculated on the basis of Wholesale Price Index (WPI) inflation projections at 6.7 per cent for 2017-18 and growth rates in exports and imports, in dollar terms, at an estimated 10.7 per cent and 24.4 per cent, respectively.

"With the southwest monsoon being close to its normal distribution, and achieving satisfactory distribution as compared to last year, the current year is expected to be a year of normal growth for the agricultural sector," the review said.

However, the economic think tank pointed out that "the Index of Industrial Production (IIP) showed a year-on-year growth of 2.2 per cent during the period April-August, 2017 versus 5.9 per cent during the corresponding period in 2016."

It also warned that investments remained a speck on the horizon. "The steep decline from 9.6 per cent in April-August 2016 to (-) 1.9 per cent in the corresponding period in 2017 in the capital goods sector reflects the low investment scenario in the economy."

The mid-year review by the NCAER says: "The Indian industrial sector is on a shaky recovery path due to the implementation challenges of the Goods and Services Tax and uneven demand."

In a separate paper attached to the mid-year review, where NCAER analysed the GST design, it recommended telescoping the number of GST rates from the current six rates to just two to make the tax simpler and easier to comply with.

The study highlights that the consumer goods sector, experienced a steep decline from 6.2 per cent to (-) 0.9 per cent during this period. To top it, "both the Nikkei PMI Index and the SBI Composite Index showed renewed weakness in October 2017 after exhibiting signs of recovery in September 2017."

Corroborating the lower possibility of India hitting the high growth trajectory this year, data shows Bank credit to business also increased at a sluggish pace of 6.4 per cent on a year-on-year basis, as of the second quarter of 2017-18: Q2, compared to business credit growth of 11.7 per cent during the corresponding period last year.

A study of the sectoral share of loans indicates that the growth in credit for industry continued to be negative at -0.44 per cent for the July-September 2017. The credit offtake for the medium industries was the worst, registering a year -on-year decline of 8 per cent, in the second quarter of 2017-2018.

India's banks are reluctant to lend as they wrestle with the burden of bad loans worth Rs 9.5 lakh crore as of June 2017. On the other hand, banks are flush with deposits after a sum of Rs 15.28 lakh crore worth of demonetised notes flowed straight back into the banking system.