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Can India's GDP grow at 7-8%?
Mon, 17 Apr Pre-Open

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.

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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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