AT A GLANCE
Real GDP slowed growth this past quarter but overall annual growth for fiscal year 2017/18 is expected to rebound to an annual rate of 7.0 %. Public finances remain stable, though there has been an increase in sub-national debt levels. The key medium-term risk is the need for recovery in private investment.
India is governed by the Bharatiya Janata Party (BJP)-led National Democratic Alliance following its victory in May 2014 national elections. The BJP, either outright or in coalition with other parties, now holds power in 14 states comprising 68 % of India’s population. National elections are scheduled for 2019.
The WBG program consists of 106 lending operations with $26.7 billion in commitments from the Bank and an IFC portfolio of $5.6 billion. Middle income India is no longer an IDA recipient. The WBG is formulating a new Country Partnership Framework to be completed this fiscal year.
Prime Minister Narendra Modi’s BJP demonstrated sustained strength in state elections in February-March 2017, building on the national electoral victory scored by the BJP-led National Democratic Alliance in May 2014. After recent elections in the largest state, Uttar Pradesh, home to one in six Indians, BJP took 75 % of the seats in the state legislature. With other results and changes in state-level coalitions, the BJP is in power in 11 states on its own and in three others in an alliance with a regional party and governs about 68 % of India’s population. National elections are next scheduled for 2019.
Key issues confronting the Indian government include ensuring high growth levels, fostering faster job creation, addressing distress in the agricultural sector, and strengthening implementation of flagship government programs.
RECENT ECONOMIC DEVELOPMENTS
Poverty has declined since 2004/5 although temporary disruptions from demonetization and depressed food prices may have moderated the pace in the short term. Real GDP growth slowed to 7.1 % in FY16/17 from 8 % in FY15/16, and to 5.7 % in Q1 FY17/18. Despite the increase in public and private consumption due to the revival of rural demand after a normal monsoon and the implementation of the 7th central pay commission recommendations, overall demand slowed as investments remained weak. Excluding agriculture, output growth experienced a slowdown compared to the previous year. Construction, real estate, and manufacturing were particularly affected.
Poverty has declined since 2004/05 although short-term disruptions from demonetization and depressed food prices may have moderated the pace. Evidence suggests that demand for social insurance (MGNREGS) increased during demonetization.
External accounts remain robust. Export growth turned positive in FY16/17, supported largely by a reversal in commodity prices and improvements in global trade. Imports have begun a gradual recovery; the merchandise trade deficit is rising. Overall capital flows gained momentum, due to ease in FDI policies and continued global liquidity. Foreign reserves rose to $386bn or 8.6 months of imports. The currency appreciated in 2017, in sync with many other emerging economies, partly due to US dollar weakening.
Public finances remain stable, although contingent liabilities are rising. The central government stuck to its fiscal targets in FY16/17, reaffirming fiscal credibility. The quality of expenditures at the general government level has shifted towards productive infrastructure spending in recent years, providing an additional stimulus to growth. However, fiscal deficits at the sub-national level have risen from an aggregate of 2.6% in FY12-15 to 3.7% in FY16-17 largely because of a transfer of some public sector enterprise liabilities to direct debt of states.
Economic activity is expected to stabilize, maintaining annual GDP growth at 7.0% in FY18. Growth is projected to increase to 7.4% by FY20, underpinned by a recovery in private investments prompted by a recent increase in public
Inflation and external conditions are expected to remain stable. Supported by RBI’s inflation targeting policy, two consecutive years of normal monsoons will further stabilize prices and offset any increase in global oil prices. The dollar-rupee exchange rate has appreciated, further adding to a low inflation scenario.
The biggest medium-term risks are associated with the recovery in private investments which continues to face several domestic impediments including the corporate debt overhang and regulatory and policy challenges, along with the risk of an imminent increase in US interest rates
Last Updated: Oct 11, 2017