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India’s Economy Rebounds

“For investment advisors only”

Buoyed by a recovery in the manufacturing sector, India’s economy rebounded in the quarter ended September 30, following five quarters of slowing growth. The country’s GDP growth rose to 6.3% for the July- September quarter, up from 5.7% in the previous quarter, which was the lowest growth rate in three years.1

As a result, the International Monetary Fund (IMF) has indicated that it may update India’s growth forecast in the January issue of its World Economic Outlook (WEO).2 Earlier, the IMF’s October 2017 WEO placed India’s GDP growth at 6.7% in 2017 and 7.4% in 2018.

The recent rebound in growth suggests that the Indian economy may have shaken off the lingering effects of the demonetization of high value currency notes in November 2016 and the rollout of the Goods and Services Tax (GST) in July 2017.3

“Perhaps the impact of the two structural reforms—demonetization and GST—is behind us and hopefully, we can look for an upward trajectory in the third and the fourth quarter,” noted India’s Finance Minister Arun Jaitley.4

According to India’s Chief Statistician, T.C.A. Anant, the manufacturing sector led the recovery, with the impact of the GST beginning to wane. The manufacturing sector grew by 7% in the September quarter compared with 1.2% in the previous quarter, according to the government statistics.5

The pick-up in recent period in economic growth provides the country’s Central Bank with enough leeway to keep interest rates on hold on December 6 in the wake of an increase in inflationary pressures. Currently, the benchmark rate is at its lowest in seven years, while consumer price inflation has surged to a seven-month high, inching towards the Central Bank’s medium-term inflation target range of 4%.1

Growth in India is also expected to increase on the back of higher levels of private investments resulting from a landmark proposal to recapitalize struggling state-run banks. This move may lead to more credit being made available to industry, leading to higher investment growth.1

 

[1] Bloomberg, November 2017, “India’s Economy Bounces Back From Three-Year Low”

[2] The Times of India, December 2017, “Buoyed by September GDP, IMF to update India's growth rate forecast in January”

[3] IMF: World Economic Outlook, October 2017

[4] Livemint, November 2017, India’s GDP growth rebounds to 6.3% in September quarter

[5] Business Today, December 2017, “India's Q2 GDP growth jumps to 6.3 per cent, breaks five-quarter slide”

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