THE GIST of Editorial for UPSC Exams : 18 JANUARY 2019 (How India’s economy smoothly navigated troubled waters)

How India’s economy smoothly navigated troubled waters

Mains Paper 3: Economy
Prelims level: GDP
Mains level: India’s economic growth

Context

•  The advance estimates of national income indicate that real gross domestic product (GDP) will grow at 7.2% in FY 2018, up from 6.7% last year.
•  The advance estimates, based on data for the first six months and up to November for some indicators, are a fair assessment of the likely outcome.
•  The earlier projections of the Reserve Bank of India (RBI), the International Monetary Fund (IMF) and the World Bank are also all higher than the advance estimates.
•  Hence, barring any major shock in the next 10 weeks, it is quite likely that the year will end with at least 7% growth.
•  This robust growth is also fairly diversified with more than 8% growth in manufacturing and 9% growth or more in electricity and other utilities, construction, and public services.

Analysing the data

•  It is particularly encouraging that the growth upturn is being led by the recovery of investment instead of debt-financed consumption as in the recent past.
•  After stagnating for several years, quarterly growth of gross fixed capital formation (GFCF) has been recovering since the second quarter of FY 2017.
•  It is now estimated to grow by 12.2% in real terms in FY 2018 compared to 7.6% in FY 2017.
•  The investment rate, which had declined to 31%, is now estimated to be back up to 33%.
•  The other good news is the low rate of inflation.
•  The consumer price index (CPI) inflation rate is now down to only 2.2% and the wholesale price index (WPI) inflation rate is 3.8%.
•  However, the decline in inflation is mainly on account of the decline in food and fuel prices.
•  Fuel prices are unlikely to harden any time soon, unless events in West Asia deliver a political shock. This has been a great boon for oil importing countries such as India.
•  It has to be assessed along with news that is not so good, on both the domestic and the external fronts. I have mentioned the expected surge in pre-election public spending.
  Shortfall in tax revenues
•  Combined with a significant shortfall in tax revenues, especially goods and services tax (GST) revenues, this will lead to several fiscal deficit targets of the central and state governments being breached.
•  On the other hand, the past record of political business cycles suggests that there could be a sharp decline in public spending in the post-election period. These swings in public spending can be destabilizing and adversely affect growth in FY 2019.
•  The implementation of the 2016 Insolvency and Bankruptcy Code and progress on resolutions under the National Company Law Tribunal are important reforms.
•  There is still a long way to go in tackling the problem of stressed assets and high levels of non-performing assets in public sector banks.
•  This is a major deterrent to growth.
•  There is also a return to discretionary interventions, demonstrated among other things by the arbitrary raising of tariffs in the last budget.
•  These too will adversely impact growth in FY 2019.
•  Emerging markets and developing countries in Asia grew at 6.5% while sub-Saharan Africa grew at 3.1%.
•  Among major economies, growth declined in 2018 and is expected to decline further in 2019 in the US, European Union, Japan and China. T
•  Together, they account for almost two-thirds of the world economy.

Way forward

•  India stands out for sailing smoothly through these troubled waters so far. It remains the fastest growing major economy in the world.
•  However, being well integrated with the world economy, India cannot continue to grow rapidly as global growth declines.
•  The trade deficit, up from 1.7% of GDP in 2016-17 to 3.0% in 2017-18, is projected to rise further to 3.5% in 2018-19, thereby completely offsetting the expansionary impact of the fiscal deficit.
•  The net reduction of nearly $30 billion in foreign exchange reserves since 1 April 2018 is also a consequence of the gloomy global economic environment.
•  These adverse external factors, combined with the domestic challenges mentioned earlier, will pull growth down to less than 7% in FY 2019.
•  It could decline further in the event of a major negative shock such as a failed monsoon or a spike in global geopolitical tensions.

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Prelims Questions:

Q.1) Consider the following in the context of World Trade Organisation:
A. The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations.
B. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.
C. The WTO is a place where member governments go, to try to sort out the trade problems they face with each other.

Choose the correct option:
A. A and B
B. A and C
C. B and C
D. All of the above

Answer: D

Mains Questions:
Q.1) Can it ignore the stickiness of core inflation around 6%, especially when central and state government spending is likely to pump-prime demand in the run-up to general elections?