The Economic Survey 2016-17 (Volume II) analysed 285 cross-country instances of countries with comparable level of credit, capex and export slowdown to India over a two-year period. Of the 285 cases, the number of such countries that also achieved 5+ per cent annual real growth was zero!

Credit to the Finance Ministry

This prompts some obvious questions. How is the GDP growing with such a big slowdown in GFCF? Why is the GFCF growing at all despite contraction in capex and the credit-to-GDP ratio? If this is all because of government spending, why has the fiscal deficit or inflation not blown up?

First, we benefited from the oil windfall. The GDP growth was boosted in a few quarters due to a sharp fall in the value of imports. While low, the oil price does not continue to fall and hence has ceased to be a driver of growth. Nevertheless, the low oil price environment has immensely helped the current account, strengthened rupee and allowed the government to raise revenue and implement counter-cyclical fiscal spending without blowing the fiscal deficit. As the exhibit 3 shows, India is very much in the fiscal stimulus territory.

The Finance Ministry deserves credit for its brave decision to not pass the benefit of lower oil price to consumers and use it for counter-cyclical capex and other spending despite serious opposition. Secondly, prudent macro-management by a stable and reform-minded government has led to a significant boost in foreign direct investment (exhibit 4), which has also counter-balanced the capex and credit slowdown.