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Pointing to the constructive work done by the Modi government in the past two years, rating agency CRISIL on Monday said a slew of repair and reforms measures will improve qualitative profile of India's economic growth in the short and long hauls.
India's economy will grow at 7.9% in the current fiscal year (2016-2017), compared with 7.6% in fiscal 2015-16, provided monsoon is normal and the global situation does not deteriorate from here.
The swing factor this fiscal will be monsoon. There were three consecutive weather shocks — two bad monsoons and a spell of unseasonal downpour in March 2015 which affected growth.
CRISIL released a report on the Indian economy — Choosing trend over cycle — that evaluates the quality of growth generated by the Narendra Modi-led government.
CRISIL, an unit of Standard & Poor's, said governments can either push the economic cycle using monetary and fiscal policy tools or they can choose to raise the trend, or potential growth through reforms.
The initiatives of government, if relentlessly implemented, will do more to raise India's trend rather than cyclical growth seen now.
Global experience suggests structural reforms are not only onerous but also raise the trend growth with a lag. In contrast, aggressive monetary and fiscal policies can have a steroidal, and often short-lived, impact on growth.
The biggest positive is that policy focus hasn't been based on populism, or on boosting cyclical growth through fiscal and monetary stimuli. Attempt has been at improving the 'trend' growth by repairing the system and initiating structural reforms wherever possible, CRISIL said.
Referring to benefits from potentially disruptive impact of digitalisation, it said while better quality makes growth more sustainable, digitalisation will lead to surprising efficiency-driven upsides. That's unlike the 'rubber-band' recovery seen after the global financial crisis of 2008 — when stimulus extended growth only to retract it once withdrawn.
The low crude oil prices have helped economic growth. The Modi government's fiscal policy been quite prudent, aimed to improve the quality of spending through better targeting, and scaling up of infrastructure investment. This is being done while keeping a tab on overall deficit. The monetary policy, too, has focused on ushering in a low and stable inflation regime.
And unlike China, current growth in India is not supported by rampant credit creation. Domestic credit growth has averaged 9.8% in the last two years, almost in lockstep with 10.2% nominal GDP growth, underscoring sustainability.
