The monsoon delivered, but investment growth remains subdued

The Update acknowledges that agricultural growth has had the most positive impact on the Indian economy in FY17. Agriculture growth jumped to 6.0 percent in the third quarter of FY2017 from 3.8 percent in the second quarter. This was the highest growth in nearly five years. The second advance estimate of production puts cereal output for FY2017 at nearly 250 million tons, crossing the previous record of about 246 million tons harvested in 2013-14.

The Update is also optimistic that growth in private investments is likely to pick up once there is greater certainty on the global outlook, as well as when implementation of the GST is more advanced.

"Private investment growth continues to face several impediments in the form of excess capacity, regulatory and policy challenges, and corporate debt overhang. However, the recent push to increase infrastructure spending and to accelerate structural reforms will eventually drive a sustained rebound of private investments," said Frederico Gil Sander, Senior Country Economist and the main author of the India Development Update.

However, credit growth, particularly to industry remains weak. Although credit data for November and December are clouded by banks' focus on exchanging old notes rather than lending, credit growth even in January and February of this year was about 3.5 percent (y/y). Banks have used higher deposits post-demonetization to buy government securities rather than to expand credit. This suggests weak credit demand, as many large corporates remain highly leveraged and global capacity in key sectors such as steel is ample, the Update says.

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