As a new financial year dawns, it is instructive to ask whether growth is on a stronger footing than before. The evidence is mixed.
Gross domestic product (GDP) is expected to grow at 7.1 per cent in FY17, down from 7.9 per cent in FY16. While precise estimates of how the economy fared after demonetisation will be available in a few years, initial estimates in chart 1 show that GDP grew seven per cent in Q3FY17, shrugging off the note ban impact. Growth was driven largely by agriculture, manufacturing and government spending.
But, other economic indicators suggest continued sluggishness. As chart 2 shows, the index of industrial production (IIP) continues to be weak. And, while the capital goods segment has surged in a few months, given its volatile nature, it’s difficult to draw a firm conclusion.
With subdued demand and stressed corporate and bank balance sheets, bank lending has plunged to four per cent as seen in chart 3. This, despite the MCLR rate (marginal cost of funds-based lending rate) declining by 120 basis points over the year as seen in chart 4.
On the other hand, as shown in chart 5, the export growth rate has risen after months of contraction, signalling a pickup in global demand. Inflation has also moderated as seen in chart 6, driven by falling food prices though core inflation remains sticky.
While many are hopeful about how 2017-18 plays out, there is reason to be cautious.
A stronger rupee (chart 7), which will erode export competitiveness, coupled with a failure to resolve the twin balance sheet problem, could drag down growth. And on the inflation front, while oil prices are expected to be rangebound (chart 8), a subpar monsoon could push the food inflation rate higher.
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