India On Cusp

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IMF is forecasting that India will grow at the rate of 7.4% in 2018 and regains the fastest growing economy status again.China is expected to slow down from 6.8% in 2017 to 6.5% in 2018.India is expected to grow at the rate of 6.7% in 2017,tad below China’s growth.Though World bank,IMF and ADB have reduced the forecast for 2017 but they all expect strong rebound on the foundation of strong reforms like demonetisation and GST.Indian government has undertaken a major reform of demonetising Rs500 and Rs1000 notes in November 2016.Another major reform, GST was launched in July 2017.GST is amalgamation of 17 different indirect taxes making India a common market.One nation one tax has potential to transform India with uninterrupted flow of goods and services from one part of the country to another part.Both are structural reforms undertaken by the government.

IMF is expecting that economy will make a strong comeback in 2018 due to these structural reforms.India is expected to achieve its desired growth rate of 8% in times to come.The blip in the economy came in first and second quarter of 2017 when we grew 6.1 % and 5.7%.RBI is expecting revival in the current festive season only.All the high frequency data indicators of August and September are showing strong recovery.Core sector grew by healthy 4.9% in August.Auto numbers of both months are encouraging and showing high single digit growth.Even the laggard commercial vehicles sales have picked up strongly.PMI composite index is also above 50 indicating expansion.The latest IIP of August month a jump of 4.3% which is nine months high.

Though government has given a small stimulus by cutting petrol and diesel prices by rupees two which will cost around 26000 cr over a fiscal year,the cry for bigger fiscal stimulus is building up.The cental government is also nudging state governments to cut VAT on petrol and diesel.Maharashtra,Gujarat and MP have already cut the prices.The government has to face assembly elections in many states including the crucial state of Gujarat.It wants strong revival in the shortest possible time frame.We may suggest that the government should divest one oil psu and raise extra budgetary resources of almost one trillion rupees.This will not impact the fiscal deficit target which has potential to unnerve FIIs.This extra budgetary resources must be spent on building infrastructure like roads and railways.

The CPI inflation is still subdued at 3.28% for the month of both august and september. Though RBI expects to harden inflation in coming months,it is definitely below the comfort level of 4% inflation.This leaves scope for at least 50 basis interest rate cut.The industry and government both have been clamouring for rate cut.The RBI has consistently expected graeter inflation and has been behind the curve.In the last one year or so,inflation has averaged 3.3%, leaving real interest rate very high and probably highest in our peer groups.If India needs to accelerate to 8% growth path,RBI should be accurate in predicting inflation and taking measures ahead of the curve.

For the time being,IMF forecast has shunned the critics who have been openly criticising the government. Internal and external critics must take cognisance of independent authority forecast.The blip in growth will be gone in few months time and we are in for a strong economic growth again.