Two years after taking power, the Narendra Modi government managed to pass a unified VAT bill. Even though it will take a few years to feel the positive effects of this reform, the bill is a major advance. The government estimates the gains in terms of potential growth at between 0.9 and 1.7 points. Even though the country still faces enormous structural weaknesses, the business climate is improving. According to the latest competitiveness report, India gained 16 ranks last year and is now ahead of Indonesia. The rating agencies have turned a blind eye to these changes so far. A high public debt continues to block any improvement in India’s sovereign rating.
- Economic slowdown
In the first quarter of the current fiscal year, GDP growth in India slowed slightly to 7.1%, from 7.5% in the year-earlier period. However, India’s GDP growth remains one of the strongest in Asia. Household consumption remains robust (+6.7% y/y) and exports swung back into positive territory after a 5-quarter decline. Net exports made a positive contribution for the first time in two years. Inversely, investment continued to contract for the second consecutive quarter (-3.1% y/y), reflecting the financial troubles of banks and companies.
India’s economic growth prospects continue to look upbeat. Dynamic private consumption will continue to support economic activity, thanks to a big increase in public sector wages (effective 1 August). The recovery of both public and private investment is more problematic. The government has much less fiscal manoeuvring room than it did last year, and it is likely to remain in a tight spot throughout the transition period following the introduction of the new VAT system. Meanwhile, companies are still pursuing debt reduction strategies.
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by Johanna MELKA