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Abu Dhabi, UAEMonday 25 June 2018

Latest data signals India's economy is on the rebound

GDP growth picked up to 6.3 per cent in the July to September quarter from a year earlier.

Indian Congress party supporters on the eve of the first anniversary of India's demonetisation scheme in Mumbai on November 7. Despite the move and the new goods and services tax, the economy is bouncing back. Indranil Muklherjee/AFP
Indian Congress party supporters on the eve of the first anniversary of India's demonetisation scheme in Mumbai on November 7. Despite the move and the new goods and services tax, the economy is bouncing back. Indranil Muklherjee/AFP

India’s economy appears to be turning a corner as growth starts to show signs of recovering, analysts say.

Fresh data from the Indian government last week revealed that India’s GDP growth picked up to 6.3 per cent in the July to September quarter from 5.7 per cent in the previous quarter.

That came as a relief to many, given the widespread concerns that had mounted after the figures from the previous quarter came in at a three-year low, with India’s demonetisation move, in which it banned its two highest value notes in an effort to reduce black money flows, and the introduction of a sales tax regime this year, cited as major factors in the slowdown.

“The disruptions caused by some of the shocks like demonetisation and the transition to the goods and services tax (GST) appear to be withering away,” says Jagdeep Kannarath, a vice president at Edelweiss, a financial services company based in Mumbai.

India needs to have high levels of economic growth to create enough jobs for its young population and raise the standard of living for its citizens. The consensus is that India needs to achieve GDP growth of about 8 per cent to realise these aims. Pressure has also mounted on New Delhi ahead of key elections taking place in the state of Gujarat this month. The concerns were so great that India’s prime minister Narendra Modi in September appointed an Economic Advisory Council to focus on how to turn the situation around.

“The recovery in India’s growth helps alleviate some market concerns about India’s growth and increases confidence,” says Sonal Varma, the chief India economist at Nomura.

The latest data – which brought an end to five quarters of slowing GDP – comes hot on the heels of another significant sign that things could be improving for the country.

In November, the ratings firm Moody’s upgraded its sovereign rating on India for the first time since 2004 – a move which came as a surprise to many.

“The ratings upgrade along with the recently reported improvement in India’s ease of doing business ranking [in a World Bank index] underline the fact that we are moving in the right direction,” says Pankaj R Patel, the president of the Federation of Indian Chambers of Commerce and Industry.

He says recent measures including the government’s continuing changes to GST – such as reductions of rates – and a recapitalisation programme for India’s struggling public sector banks, are initiatives that have helped improve the economic outlook.

“India’s growth story is more promising than ever and we see a further improvement in the confidence level of global investment community. This move will not only give a further push to foreign investment inflows into the country but will also enhance our prospects of borrowing money abroad at better rates.”

Boosting foreign investment flows into the country is high on Mr Modi’s agenda as he bids to allow the country’s economy to expand at a faster rate and to create employment opportunities, with about one million Indians entering the workforce every month.

Mr Modi, speaking at the Global Entrepreneurship Summit in Hyderabad last week, a high-profile event that was attended by Ivanka Trump, the daughter of US president Donald Trump, called for foreign investors to look at the opportunities in India.

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“To my entrepreneur friends from across the globe, I would like to say, come, make in India, invest in India,” Mr Modi told the conference. “I invite each one of you to become a partner in India’s growth story.”

Niranjan Hiranandani, the president of an Indian real estate body Naredco and the founder-chairman of the Mumbai-based Hiranandani Group, a property developer, says that “the Indian economy is on a radical shift mode”.

“It is the positive result of reforms, a good monsoon, check on inflation, bank recapitalisation, which have cheered up the market sentiment,” he says.

Analysts forecast there could be a further pick-up in the economy.

“We expect the growth to pick up to 7.6 per cent in the second half of this fiscal,” according to a research note by Crisil, which is part of Standard & Poor’s. The firm says India’s growth numbers have largely been boosted by a revival in industrial activity, in manufacturing and mining, for example. The latest Purchasing Managers’ Index figures show that the manufacturing reading in India rose to a more than one-year high in November.

But Crisil warns that there could be dampening effects on India’s GDP growth prospects.

“Administrative issues related to tax refunds under GST and repeated changes being made to the structure and tax rates continue to lead to uncertainty for businesses and may weigh on growth in the road ahead, particularly for small scale units,” according to Crisil. “That would have negative implications for employment.” There are also factors such as rising commodity prices that could cloud the outlook, it says.

“That said, growth will continue to be consumption-led in the second half of fiscal 2018 backed by a near normal monsoon, softer interest rates and inflation.”

Others are not convinced that the situation is rosy at all. While the figures may be encouraging, many businesses are not seeing this reflected on the ground.

A number of small businesses in particular, which were heavily dependent on cash, were squeezed in the wake of demonetisation, which sapped liquidity out of the system. They then suffered another blow when GST was introduced at the beginning of the July, with the new system being largely tech-driven and requiring regular filing of accounts.

“My business is struggling,” says Vasant Atakari, who owns a small textiles shop in Mumbai. “I don’t know if it can survive. I’m not seeing any improvement at all.”

The official figures reveal that there are certainly sectors that are battling to find higher levels of expansion. While manufacturing rose by a healthy 7 per cent in the July to September quarter, the construction sector only increased by 2.6 per cent, while agriculture – on which more than half of the Indian population depends for their livelihoods – slowed to 1.7 per cent growth.

Shilan Shah, the India economist at Capital Economics, also raises some concerns, saying that “elements of the data are hard to square with evidence from other indicators”.

“India’s GDP data are much-maligned,” he says. “Consistent data go back only as far as 2012 and they have not aligned over that time with other indicators of economic activity.”

He points out that credit growth to industry contracted in the past quarter while private consumption growth also dropped. Nevertheless, he concedes that the bigger picture does look positive.

“The broad trajectory of a pick-up in growth seems reasonable, and we think the economy will continue to strengthen over the coming quarters.”