INDIAN ECONOMY: GOING THROUGH TWIN TRANSITION

-- 2QFY18 GDP growth – released last week – witnessed some very interesting trends, which, if sustained for a few more quarters, could set the stage for sustainable growth in the economy. Our analysis reveals that while private spending (consumption + investments) grew at the fastest pace in three years in 2QFY18, fiscal spending (center + state governments) grew at the slowest pace in 13 quarters.

-- Moreover, fiscal capex declined for the first time in 11 quarters in 2QFY18. The latter confirms that fiscal policy is reaching its limits in providing support to domestic economic recovery. Almost the entire growth in 1HFY18 was driven by private spending, which was offset by rising trade deficit.

-- These trends, if sustained beyond FY18, bode well for the much-needed twin transition we have been talking about in the last two years (a) GDP growth shifting from consumption-driven to investment-led, and (b) the private (households + corporate) sector taking the mantle from the government in driving investment growth. Since we expect the transition to continue in 2HFY18 as well, we expect real GDP growth also to remain muted – average 6.6% YoY in 2HFY18 versus 6% in 1HFY18.

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