Home Economy and Finance Facts, No Fiction: Growth prospects of the Indian Economy

Facts, No Fiction: Growth prospects of the Indian Economy

It is highly likely that our growth estimates may outperform the estimates of 7.2-7.5% as it did with FY Q12018-19. My bet is 7.4-7.7% would be a realistic forecast for the year, but I may not be surprised if it is beyond this figure; in fact, it would be reassuring to see growth go beyond these figures.

There has been a lot of talk regarding the performance of the Indian Economy and a bulk of the conversation has remained focused on the downside risks to growth while it has often ignored the upside potential for the same. It is almost amusing when I see commentators ignore important macroeconomic indicators while forecasting the future growth of the Indian Economy. The lack of due consideration of these variables is what results in the gross systematic errors that such forecasts make.

That being said, let’s admit that forecasts are just forecasts and they’re determined upon the information that is made available to us as of today. Thus, while modelling, we must make use of all the relevant information and data points that have been made available to us. This has been my bone of contention that most analysts tend to pick only a very narrow set of variables and this focussed approach often results in inconsistencies between the forecasts and actual growth estimates.

The forecast for FY2018-19 is at 7.2%-7.5% of GDP growth rate. Most analysts seem to agree upon this figure as an accurate assessment of what growth might look in this financial year. I, however, disagree as my assessment is that this is a very conservative estimate of the growth rate. In my opinion, the growth rate would be around 7.4-7.7% for the FY 2018-19 and this article explains why these forecasts are marginally higher than the ones presented by others.

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There are reasons to believe that the acceleration in the growth may outperform the expectations as India has entered into a positive business cycle since last year and this positive business cycle is going to provide growth with this additional momentum of up to .2% on both the lower and upper bound of the forecast.

What these graphs show is that capacity utilization of manufacturing firms went up in the year FY2017-16 and this has further accelerated in FY2018-19. The increase in capacity utilization is synonymous with the increase in private investment as a percentage of GDP as witnessed in the year FY2017-18. This means that by the end of this year, we may witness an even higher share of private investment as a percentage of the GDP.

But it is not just investment and a positive business cycle that leads me to believe that growth will outperform the expectations. I had made a similar claim for Q1FY 2018-19 estimates which most expected to be within 7.9% while the assessment we had made was putting it at above 8% when the estimates were announced, it was at 8.2%.

Other underlying reason for India’s growth to accelerate are the fact that the economy is now well transitioned from the tectonic shifts it went through due to successive reforms. Given that the economy has well absorbed the initial impact of these reforms, it is only rational to assume that the positive impacts of these reforms are going to pull up the growth this year. To talk as in econometric jargon, we used the VAR model and generated the orthogonal impulse response function to validate this claim and it shows that there is a strong indication of growth being driven up due to these reforms in this financial year itself.

There are concerns that analysts have highlighted over India’s Current Account Deficit (CAD), the decline in the value of rupee, international oil prices along with the slow global growth. These concerns are legitimate downside risks to the long-term growth potential of India but with oil prices on a decline and India deciding to buy oil from Iran, the impact of them will largely be subdued. CAD will be an issue that requires us to explore long-term solutions and the government has already indicated its desire to switch to an alternative mode of fuel such as electricity. The global growth factor is also not as significant as India’s domestic demand continues to be robust. A good example of this is the fact that the automobile sector has found it difficult to exports its products as the domestic demand is absorbing a major share of our production capacity.

Thus, it is highly likely that our growth estimates may outperform the estimates of 7.2-7.5% as it did with FY Q12018-19. My bet is 7.4-7.7% would be a realistic forecast for the year, but I may not be surprised if it is beyond this figure; in fact, it would be reassuring to see growth go beyond these figures.

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