India's economy has bounced back after policy reforms, says Deloitte

02 May 2018 4 min. read
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Barring the manifestation of certain risks, global professional services firm Deloitte predicts a promising 2018 for India’s economy in light of positive indicators across the board. India’s GDP grew at an average 6.5% over the course of financial year 2017, and is estimated to cross the 7% mark by next year.

There is general consensus, particularly within the consulting industry, that India’s economy is back on a positive trajectory, following a worrying slump early last year. Late in 2016, the government’s demonetisation drive involved the discontinuation of India’s two highest currency denominations – a policy which sought to tackle the issue of black money – but also put a strong squeeze on cash flows in the process. 

Early in 2017, the government introduced the comprehensive Goods and Services Tax (GST), which combined the various taxation requirements in the country to form a single, streamlined process. Again, the policy was aimed at simplifying business, but caused a major disruption in the short term, as companies scrambled to comply with the new stipulations.

Industrial production trends in India

The policies were implemented with the expectation that the initial slump would pass, paving the way for a much stronger economy than before, within the new framework. The slump most definitely arrived in the first half of 2017, when production levels, trade balance, and IPO activity in India all saw sharp declines.

However, India’s economic performance across a range of metrics since the start of this year indicates that the country might have successfully turned the corner. Earlier this month, accounting and advisory firm Grant Thornton published its analysis of the first quarter 2018, which revealed an upward shift in all the aforementioned segments, accompanied by predictions for a strong year ahead.

Now, a new report from Big Four firm Deloitte titled ‘India Economic Outlook 2018’ has reinforced these observations, also using production value and trade balance as primary indicators. Deloitte has previously published in-depth analysis about India’s economy, arguing that the relatively young and skilled population would drive growth for all of Asia over the next few years.

India GDP growth rates

The first indicator of this positive forecast is the recently surging value of industrial production, which includes the manufacturing sector as well as the production of capital goods. Overall industrial production levels have fluctuated considerably since the policy reforms, dropping from just under 4% in early 2017 to just over 1% by July of the same year, before skyrocketing in the last few months of 2017 to reach nearly 14% early this year. The country’s trade balance also saw a similar 'bowl-shaped' curve over the course of last year.

Both these factors had their impact on the rate of GDP growth in the country. India began 2017 with a GDP growth rate of just over 6%, and ended at nearly 7%, averaging 6.4% across the year. This year, the growth rate is expected to reach 6.7%, and is anticipated to reach as high as 7.2% by next year.

One trend of the last few years that the report notes – ostensibly as a result of political and economic reforms in India – is the “decoupling” of the country’s GDP growth trajectory from that of the world. Up until around 2013, India’s GDP fluctuated more or less in tandem with the global GDP. Since then, while the economy has been amongst the strongest in the world, it has drawn a trajectory largely separate from the global scenario. 

GDP decoupling between India and the world

Commenting on the report, Richa Gupta, a Senior Economist and Senior Director at Deloitte India said, “The main message from our report is that the disruptive impact of demonetisation and GST seems to be over and we can expect much higher GDP growth this fiscal year than 2017-18.”

On the possible risks facing the economy, she added, “We expect inflation to remain high, in the range of 5-6 per cent during the first six months of the calendar year, after which we are likely to see a decline as a relatively higher base is expected to cushion against higher inflationary readings. We certainly don’t see a cut in interest rates.”