Rising prices of crude oil, higher local inflation and slim chances of lower interest rates threaten to rein in the economy even as the performance in 2017-18, so far, points to a muted recovery. While the worst may be over, unless the government keeps up spending in 2018-19, the economy may see middling growth in the next few quarters. India’s GDP growth slowed to a 13-quarter low of 5.7 per cent year-on-year in the April-June period but recovered to 6.3 per cent y-o-y in the July-September quarter.
Despite a small base, many segments of the economy haven’t really reported improvements so far. Railway freight (in tonnage) has increased by just 4.7 per cent till October. The M&HCV segment reported a growth of just 1.2 per cent y-o-y between April and November, on a negative base. The biggest disappointment has been exports which have grown just 12 per cent in FY18; in the corresponding period of FY17 they had stayed virtually flat.
Economists expect a slight deterioration in the current account balance, should oil prices move towards $70 per barrel, from current levels of about $65 per barrel, with the possibility of the balance of payments turning negative in 2018. Moreover, it would stoke inflation leaving RBI with little option but to hold rates. Consumer inflation came in at 4.88 per cent for November, highest in 15 months. Another worry is the rural distress, even though both the kharif and farm harvests should be reasonably good.
On the positive side, they believe growth would normalise over the next four or five quarters as the impact of demonetisation and the
GST rollout fades. While the liberalised rules will make it easier for firms to comply with the provisions, the cuts in the tax rates under GST and the higher level of cash in the system, they feel, would stimulate demand.
Moreover, the Rs 2.11-lakh-crore recapitalisation of banks’ balance sheets would set the stage for renewed lending. The rise in bank loans has been modest though there is a fairly sharp jump in borrowings from the bond markets, accessed both by firms and NBFCs. Economists at Deutsche Bank believe real GDP growth could bounce back to 7.5 per cent in 2018-19 from a possible 6.6 per cent in 2017-18, supported by strong consumption spends and some pick-up in private capex activity. Gross fixed capital formation (GFCF) slipped to 26.4 per cent of GDP in Q2FY18 from 30.4 per cent in Q1FY16. Firms remain highly leveraged. A study by Credit Suisse showed for the September quarter the share of debt with companies that have an interest cover of less than one saw little change at 40 per cent compared with 42 per cent in the June quarter even as the aggregate interest cover improved sequentially to 2.4 times on the back of a growth in operating profit or ebitda of 4 per cent. FE
Source: indianexpress.com