Sunday, Nov 18, 2018 | Last Update : 03:15 AM IST

Let’s be cautious. It’s too early to celebrate

THE ASIAN AGE.
Published : Sep 2, 2018, 12:00 am IST
Updated : Sep 2, 2018, 12:00 am IST

Government’s spending will perforce be limited by fears of missing the fiscal deficit, unless it can raise its revenue sources.

The collection from GST has been rising and this is a good sign.
 The collection from GST has been rising and this is a good sign.

It is official. India is the world’s fastest growing economy, clocking a robust 8.2 per cent growth in the April-June quarter, the highest since the 9.3 per cent in the January-March quarter of 2016. It has raced past China’s little over 6.7 per cent growth and is poised to overtake the UK to become the fifth largest global economy. This is no mean feat for a near $3 trillion economy. The larger picture, however, is very challenging. India still has a long way to go to catch up with China’s $14 trillion economy. But it is not far from Japan with a $5.1 trillion economy, and is ranked third according to the IMF’s figures.

The April-June 2018 quarter growth was propelled by manufacturing and construction, which grew at 13.1 per cent and 8.7 per cent respectively. Agriculture too contributed a sturdy 5.3 per cent. Whilst it is not too early to celebrate this unexpected growth, there is a cautionary tale. It is the government that is behind this growth with its expenditure on infrastructure and construction activities, primarily on roads and affordable housing. The private sector is still lagging behind, due to over-leveraged books, unutilised capacity and political uncertainty with the elections a few months away. But indications are that private sector investment is reviving as the crippling effects of the disastrous demonetisation of Rs 1,000 and Rs 500 notes and hasty implementation of the Goods and Services Tax are receding.

Sustaining this growth is a challenge and will require concerted effort both on the part of the government and the private sector. Government’s spending will perforce be limited by fears of missing the fiscal deficit, unless it can raise its revenue sources. The collection from GST has been rising and this is a good sign. The government will have to create an enabling environment for the revival of the medium, small and micro sector which bore the brunt of demonetisation and GST. This sector is the backbone of the economy besides being job generators.

There are both domestic and global headwinds that would have to be overcome on the path towards growth. Amongst the challenges India will face are rising crude prices, a weak rupee which makes imports, particularly that of crude more expensive. India is a net guzzler of imported oil and there is a crying need to accelerate the pace of alternative energy sources. India has the tremendous advantage of sunshine for nearly nine months a year, which is conducive to the development of solar power on a war footing. Interest rates are also edging higher and this could add to slower growth. Household expenditure will have to increase to spur demand. On the global front, the rising protectionism led by US President Donald Trump is seeing retaliation by other countries that have imposed tariffs in retaliation and this is a serious threat to global trade. A blow to India’s exports due to this could hurt the manufacturing sector, which has just shown a healthy revival after lagging for several quarters.

Tags: demonetisation, gst