India: Economy is expected to gain traction - NAB

The Indian economy has slowed considerably since the first half of 2016, but an improvement in activity is expected over the coming quarters, according to analysts at NAB.

Key Quotes

“The demonetisation program and the recently-implemented GST legislation were disruptive factors. They, nevertheless, do not account for the slowdown in its entirety. The Indian economy enjoyed windfall gains through lower oil prices, the effect of which has largely been eroded. Looking ahead, the economy is expected to gain traction as the impact of disruptive factors fades away. A focus on supply-side reforms will likely yield better results than pursing aggressive policies to lift demand.”

“Outlook: Pickup expected

• An improvement in activity is expected over the coming quarters.
• With the temporary factors such as demonetisation and GST implementation challenges expected to recede, the Indian economy should gain momentum. Econometric modelling by NAB Economics using a leading indicator approach suggests that industrial production activity is expected to expand by 6.2% yoy in the March quarter, 2018. In that regard, the recently released August 2017 results are encouraging. NAB Economics is forecasting a 6.8% outcome for real GDP in 2017, rising to 7.4% in 2018.
• To ensure a durable recovery, supply side factors should be the primary focus. Speeding up project clearances, simplifying the taxation (including GST) regime, improving the ease of doing business – including cutting red tape, and continued progress in addressing banking sector stress will help bolster the country’s growth potential. A focus on demandboosting policies could ignite inflationary pressures, which might have to be curbed through interest rate rises, rendering them less effective.”