Can India's GDP grow at 7-8%?

Mon, 17 Apr Pre-Open

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If GDP numbers are to be believed, India is the fastest growing nation. For the quarter ending December 2016, GDP grew by 7% in comparison to the same period in 2015. In fact, the second advanced estimates by Central Statistical Organisation (CSO), projects GDP growth of 7.1% for FY16-17.

The growth of 7% in the last quarter came in as a surprise because the quarter was badly hit by the adverse impact of demonetisation. It not only creates serious doubt about the reliability of the GDP data, it also makes a strong case of spill over in the fourth quarter.

However, it is widely believed that Indian economy is back on its long term growth path. And the CSO expects Indian economy to deliver robust 7.1% for FY16-17 and a growth of around 7.5% in FY18.

This simply comes with an assumption that Indian economy had negligible impact of demonetisation. Even if one believes it to be true, the big question remains - Is Indian economy prepared for same kind of growth for next five years?

Well, one need to really look at the challenges the Indian economy is facing:

• Gross fixed investment in India was stagnated last year. If we look at it as a ratio of GDP it has shrunk from 30% in FY15 to 27% in FY17. It is very rare for any country growing at 7% plus with gross fixed investment rate below 30%.
• The Twin balance sheet problems. The problem of high NPAs for both public and private banks. The highly leveraged corporate India's balance sheets continue to be a problem for Indian economy.
• Farm loan waiver Program. The recent announcement by the Uttar Pradesh government of Rs 37,000 crore will weaken both the financial system and governmental efforts towards fiscal consolidation.
• The recent ban on liquor sales near highways could have major adverse consequences for the hospitality and tourism industries.
• India's merchandise exports have stagnated since 2011-12. With the slowdown in the emerging economies and fall in commodity prices, Indian exports have been subdued.

The implementation of GST and the remonetisation the GDP growth may get a boost. However, we believe for GDP rate to grow sustainably at these rates, government will have to tackle successfully above mentioned challenges.

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