Is the Indian economy on the verge of a turnaround?

In all the analysis about the state of the Indian economy, we keep hearing Demonetisation and GST. True that these are two critical policy initiatives and must be debated but there is enough evidence now that other factors also play an important role in hurting the Indian economy. In my earlier analysis, I showed how India was struggling to boost exports in seven key sectors. India's trade surplus has been negative for a long time and while we have managed to survive through services exports, remittances and FDI, the lack of any advantage in Merchandise exports is evidence of lack of capabilities on key fronts of the economy. Further, our imports have been rising at a faster pace than exports.

Today while looking at the imports data in greater detail, I discovered a couple of interesting insights. I will take you through that analysis and then tie them to why I think we are on the verge of 'achche din'. Let us start with studying our imports this year in greater detail -

The increase in commodity prices alone contributed to 27% of the increase in India's imports. The surge in Gold Imports made up for another 23%. Essentially only 50% of India's jump in Imports were for legitimate consumptive reasons.

Now, let me be clear that this is not unusual. It is just that in the quest of ascribing everything to Demonetisation or GST, some traditional reasons for import surges are ignored

Let us look at why commodity prices played a crucial role in surging imports.The following table was provided by the World Bank. On key commodities like energy and base metals, prices are significantly higher in 2017 versus 2016. This is after literally collapsing from 2014. The great news for India is that commodity prices will settle down in 2018 probably stabilising the trade deficit and therefore providing a bump to GDP growth

Contrary to popular belief, commodity prices have played a crucial role in the Indian economy. Since February 2009 when the commodity index fell to 209.4, the prices went up more than two-fold to 437 by June 2014. However in 7 months between June 2014 and January 2015, the index fell by nearly half to 235, it fell down further to 141 by Jan 2016. This helped India mount a quick economic recovery by Jan-March 2016.

After falling to 141 in January 2016, the index first went upto to 197 in January 2017 and is at 207 now.

India's GDP in Jan-March 2016 (when commodity prices had falled to its recent bottom) was a whopping 7.9 % at constant prices. As the commodity prices went up (141 in Jan 2016 to 197 in Jan 2017) and the demonetisation impact came through, GDP growth at constant prices came down to 5.6% in Jan-March 2017

As the world bank forecasts (above) show, the next year (2018) is likely to be quite comfortable on the commodity price front. Couple that with low base impact (poor/ ordinary economic performance in first two quarters of 2017-18) and a likely decent monsoon (see chart below), the next 12 months are likely to show a significant spike in GDP numbers.

Source: NOAA

There are numerous counter forces like credit growth, unemployment, capacity utilisation, growing personal debt and so on. However, it is unlikely many of these will deteriorate any further in 2018. Therefore,

The 3 factors - Stable Commodities in 2018, Good Monsoon in 2018 and Poor economic performance in 2017 is likely to lead to a much awaited achche din (High GDP growth percentage) in 2018, just in time for the next general elections