After slowdown, India poised to win back fastest growing economy title from China

India is set to once again emerge as the fastest growing economy in the world. The United Nations on Monday put out a report saying, the country’s economy is expected to grow at 7.2 per cent in 2018 and 7.4 per cent in 2019. This growth rate still falls short of government’s expectations of 8 per cent but it may still help India win the fastest growing economy title from China.

India had lost the fastest growing tag in early 2017 after Prime Minister Narendra Modi outlawed old Rs 500 and Rs 1000 currency notes, bringing cash-based economic activities to a halt. Even before the Indian economy could recover from the woes of note ban, the government rolled out the biggest tax reform-GST. It further aggravated the economic activities, bringing down the growth to the lowest of 5.7 in last 13 quarters. However, in July-September quarter, India gained marginal recovery and recorded 6.3 per cent GDP growth.

The United Nations in its report titled: World Economic Situation and Prospects 2018 said that the outlook for India remains largely positive, supported by robust private consumption and public investment as well as ongoing structural reforms. “Hence, GDP growth is projected to accelerate from 6.7 per cent in 2017 to 7.2 per cent in 2018 and 7.4 per cent in 2019,” the report said. With this rate of growth, India will beat China in GDP growth as Beijing is likely to keep 6.5 per cent growth target in 2018. The United Nations isn’t the only financial institution with strong economic growth forecast for India. Here are some other predictions by leading financial services companies:

Morgan Stanley
Earlier this week, global financial services firm Morgan Stanley said that the India’s GDP growth is expected to grow from 6.4 per cent this year to 7.5 per cent in 2018 and further to 7.7 per cent in 2019. It further said that corporate return expectations and balance sheet fundamentals were improving, and a strengthening financial system should be able to meet investment credit demand. “This sets the stage for a fully fledged recovery in 2018, and we expect real GDP growth to accelerate from 6.4 per cent in 2017 to 7.5 per cent in 2018 and further to 7.7 per cent in 2019,” Morgan Stanley added.

US-based credit rating agency Moody’s Investors Service recently said that the India’s GDP growth will gradually accelerate to around 8 per cent over the next three to four years. According to Moody’s, the economy will grow 7.5 per cent in fiscal year 2017-18 and 7.7 per cent in fiscal year 2018-19. The agency further said that the structural reforms such as GST and bankruptcy code will help reduce inefficiencies and improve trend growth over the long run. The agency, however, cautioned that persistent banking sector weakness from a high proportion of Non-performing assets on bank balance sheets will weigh on growth, if not resolved, by constraining credit for investment related activity.

Bank of America Merill Lynch
Bank of America Merill Lynch expects India to record a ‘shallow recovery’ in 2018. In a report, global brokerage Bank said: “We expect India to continue to see a shallow recovery in 2018. Growth will likely inch up to 7.2% in 2018-19 (and 7.6% in 2019-20) from 6.5% in 2017-18.” The bank further said that economic recovery will continue to be driven by consumption, supported by a pre-poll step up in public spend rather than investment, given the persistence of surplus capacity and tight 3.2 per cent of GDP fiscal deficit target.

Global investment banking firm Nomura has pegged India’s GDP growth in 2018 at 7.5 per cent. In a report, the Japanese investment firm said that the Indian economy is on the cusp of a cyclical recovery and the government has continued to implement structural reforms and prudent macro policies, the tangible benefits of which may be harder to pinpoint right now, but over time will be positive for growth. “We remain bullish on India’s macroeconomic outlook,” Nomura said in its Asian economic outlook 2018. Nomura expects the growth in the first half of 2018 to be at 7.8 per cent. “We expect a growth of 7.3 per cent in 2019 – a solid print, aided by manufacturing and private services on the supply side and investment and private consumption on the demand side,” the report said.

A word of caution from United Nations
The United Nations’ latest economic report said that the anaemic performance of private investment remains a key macroeconomic concern for India with gross fixed capital formation- as a share of GDP- falling to 30 per cent in 2017, from 40 per cent in 2010. It said the credit is subdued and there is low capacity utilisation in some industrial sectors while the banking and corporate sectors feel the balance sheet problems. “In this environment, vigorous public investment in infrastructure has been critical in propping up overall investment growth,” the report added.