Article29 November 2017Reading time about 3 minutes

Indian economic growth might have bottomed

But, with no recovery in sight, we see limited scope for policy accommodation and sub-potential GDP growth in the period ahead

In this article

Consensus for GDP growth in 2Q FY2017/18

A cycle low in GDP growth may be behind

We, in line with consensus, forecast India’s gross domestic product (GDP) growth accelerating to 6.4% year-over-year in the July-September quarter, the second quarter of the current fiscal year. Growth slowed to a 3-year low of 5.7% YoY in the first quarter. The anticipated improvement informs more about what happened a year ago -the low base effect - than what happened this year. GDP data is due on Thursday, November 30.  

But where is recovery?

Weak domestic demand remains a drag on GDP growth.

Demonetisation in late 2016 hurt private consumption and the introduction of a Goods and Services tax in July this year intensified the negative impact. The GST also weighed on business, causing lower profits and therefore weak investment spending. A modest acceleration in export growth in the last quarter met with continued strong import growth and wider trade deficit sustaining net trade a drag on GDP growth for the third consecutive quarter.  Agriculture and industry remained the product-side sources of weak GDP growth.  

Policy status quo

This is important data before the next Reserve Bank of India monetary policy meeting next week (December 6). GDP growth will likely remain below potential over the rest of the FY2017/18 and well into the next financial year. We also expect inflation to continue to grind upward due to rising global oil prices, the weaker rupee and the wider fiscal deficit. There will be little to no scope for increased fiscal or monetary policy accommodation to support growth in the near-term.

Expenditure-side sources of year-over-year GDP growth