India will still grow faster than the trend rate

For fiscal 2019, we are lowering our GDP growth forecast by 10 basis points (bps) to 7.4% from 7.5% estimated earlier. Forecasts of lower global trade and GDP growth has created a downward bias to growth in emerging economies.

Globally, growth started losing steam earlier this year with second-quarter GDP data for most economies coming below consensus and also lower than the first quarter. Amid escalating trade wars, rising input costs from rising oil and commodity prices also were a drag on growth.

With this in sight, the International Monetary Fund (IMF) revised down its global GDP growth estimate to 3.7% in 2018 from 3.9% earlier. The global trade growth estimate was pulled down to 4.2% for 2018 from 4.8%. The growth forecast for emerging economies was revised down to 4.7% from 4.9%.

As the trade intensity of growth declines, India’s exports, which saw a revival in early part of 2018, could likely see slower growth. The upturn so far in exports was being led by a low base, easing of constraints posed by GST implementation and lingering impact of global trade revival in 2017.

Despite the downward revision, at 7.4%, India’s growth in fiscal 2019 will be faster than both, the 6.7% seen in fiscal 2018 and the trend rate of growth. The long-term average growth rate seen in the last thirteen years – as per the recently released GDP back series data – is 6.9%.

For the rest of this fiscal, growth will find support from private consumption, driven by continued government spending on construction activities (rural roads, affordable housing and MGNREGS projects), benign inflation, and revision in government salaries at the state level. In addition, there is a weak-base effect in play.

Despite some pick-up in capacity utilisation rates for a few sectors such as auto, cement and steel, private investment has remained sluggish with most corporates preferring to deleverage rather than take up hefty investments. Investment growth, therefore, is only firing on one cylinder – government spending – through the public sector, and higher capital spending by states.

The forecast has a downward bias given that global growth prospects are turning weaker than estimated earlier. Also, if liquidity issues persist in the financial system, demand could get further dented.