India’s gross domestic product (GDP) grew by 7.1% in fiscal 2016-17 as compared to 8.0% in 2015-16 according to data released by Central Statistics Office. Thus, Indian economy slows down in fiscal 2016-17: the first trend reversal after acceleration over last many years. Of the various components of GDP, government final consumption expenditure (GFCE) recorded highest growth rate of 20.8% due to the government’s wage increase on account of implementation of seventh pay commission report in 2016-17. However, private final consumption expenditure (PFCE), the largest component of GDP that constitutes a little less than 60% of GDP, grew by 8.7% which is far less than growth rate of GFCE, yet significantly higher than corresponding rate of 6.1% witnessed in 2015-16. On the other hand, Gross Fixed Capital Formation (GFCF) grew by meager 2.4% bespeaking weaker investment. It is also far below the corresponding rate of 6.5% recorded in 2015-16.
Although Indian economy slowed down in 2016-17, it still remains fastest growing among major world economies based on their growth rate in 2016-United States (1.6%), China (6.7%), Japan (1.0%), Russia (-0.2%), Turkey (2.9%), Brazil (-3.6%), Mexico (2.3%), high income countries (1.7%), developing countries (3.6%), BRICS (4.2%), World (2.4%). BRICS consists of Brazil, Russia, India, China and South Africa. However, quarterly analysis within fiscal 2016-17 shows that India’s GDP growth rate declined in all the four quarters of that fiscal and was lowest at 6.1% in the last quarter (Jan-March 2017). This is far below China’s GDP growth rate of 6.9% in the same quarter.
The dismal performance of Indian economy in Jan-Mar 2017 quarter could be mainly due to the government’s demonetization measure introduced in November 2016. However, for entire fiscal 2016-17, there could be various other factors at play. Such factors could be sluggish investment, high cost of capital, global economic scenario, etc. As GFCF constitutes approximately 30% of GDP, sluggish investment could have played important role in shaping growth trajectory of Indian economy.
Sluggish investment can be attributed to capacity under-utilization and poor credit off take. As the debt-laden corporates found it difficult to repay their loans, banks’ non-performing assets (NPA) increased which increased their risk aversion and forced them to adopt cautionary approach while lending to corporates. This impacted availability as well as cost of the capital impacting the investment scanario.