Janjivan Bureau / NEW DELHI : Economic Survey forecast on Thursday that economic growth could get back up to 7% percent this year, but cautioned it will face challenges keeping its fiscal deficit in check.
The views were expressed in an annual economic survey presented to parliament one day before Finance Minister Nirmala Sitharaman presents the budget for the fiscal year that ends in March 2020.
India’s growth cooled to 6.8% in the year that ended on March 31, its slowest rate of expansion in five years.
“Growth in the economy is expected to pick up in 2019/20 as macroeconomic conditions continue to be stable,” said the finance ministry’s chief economic adviser, Krishnamurthy Subramanian, the report’s main author.
Prime Minister Narendra Modi’s government is widely expected to push up spending in Friday’s budget to spur activity, by offering tax incentives to boost consumer demand and investment, officials of his political party said.
A shortfall in monsoon rains, pivotal for the farm sector that constitutes about 15% of the economy, employing nearly half of India’s workers, has increased concern about rural distress and strengthened the case for government intervention.
But the report said India faces a challenge on the fiscal front: the economic slowdown has impacted tax collection, while state spending on the farm sector is rising.
In an interim budget unveiled in February, ahead of a general election, the government set 3.4% of gross domestic product (GDP) as a target for 2019/20’s fiscal deficit.
“We are sticking to the fiscal consolidation path for the last five years. We anticipate that path will continue,” Krishnamurthy told reporters after the release of the report.
To allow higher spending, the fiscal deficit target might be lifted to 3.6% on Friday, a senior government official told Reuters.
Otherwise, to meet the initial target of 3.4%, the government will have cut expenditure by 700 billion Indian rupees to 800 billion Indian rupees ($10-12 billion), the official said.
In 2018/19, the government resorted to spending cuts of nearly 1.5 trillion rupees to meet the upwardly revised fiscal deficit target of 3.4% after a fall in tax collections.
The annual survey gave no projection for the deficit. Economists believe the real figure has to exceed 3.4%, because already in the first two months of the current year, the deficit equalled 52% of the total targeted for 12 months.
RAISING INVESTMENT
The report urged the removal of hurdles to private investment and a further opening of the economy to foreign investors to boost growth to over 8% annually, which would make India a $5 trillion economy in five years.
In January-March, annual growth slumped to 5.8%, the slowest pace in 20 quarters, and more recent indicators such as plummeting industrial output and automobile sales have stoked fears of a deeper slowdown.
Krishnamurthy said transmission of monetary easing was key to reduce the cost of capital in the economy.
India’s central bank, Reserve Bank of India (RBI) has cut benchmark repo rate by 75 basis points (bps) since February, but commercial banks have reduced lending rates by only 10-15 bps as they are saddled with huge distressed assets amounting to near $150 billion.
Indian financial markets largely shrugged off the economic survey and investors said they would prefer to wait for the budget on Friday for direction.
“The survey identifies problems and its core is India to be a $5 trillion economy by 2024/25, which looks a bit optimistic,” said Devendra Pant, chief economist at India Ratings & Research, the Indian arm of the rating agency Fitch.
“It is banking on productivity growth of 70 basis point compared with the United States,” Pant said.
Investment rate, which was been declining from 2011-12, seems to have bottomed out, and is expected to pick up in consumer demand and bank lending.
However, economic slowdown impacting tax collections and rising state expenditure on farm sector may put strains on the fiscal front, the survey presented in Parliament by Finance Minister Nirmala Sitharaman said.
The real Gross Domestic Product (GDP) growth, which slowed to a five-year low of 5.8 per cent in the first three months of 2019 — well below China’s 6.4 per cent — is expected to rise to 7 per cent in the fiscal year 2019-20 that started in April.
The GDP growth was 6.8 per cent in the previous 2018-19 fiscal year, down from 7.2 per cent in 2017-18.
The expansion in the economy will be driven by investment and consumption, with political stability auguring well for the growth prospects, it said, adding that the upside and downside risks to growth are evenly balanced with monsoon rainfall seen tipping the scales.
But for India to become a $5 trillion economy — more than double the current size — by 2024-25, it needs to sustain a real GDP growth rate of 8 per cent, which international experience suggests is possible only through a sustained “virtuous cycle” of savings, investment and exports.
“The political stability in the country should push the animal spirits of the economy, while the higher capacity utilisation and an uptick in business expectations should increase investment activity in 2019-20,” the survey said.
Authored by Chief Economic Adviser Krishnamurthy Subramanian, the survey stated that investment (especially private) is the ‘key driver’ that boosts demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates jobs.
Oil prices, the Economic Survey 2018-19 said, will decline in current fiscal, pushing consumption.
Consumption accounts for about 60 per cent of the GDP.
“However, downside risks to consumption remain. The extent of recovery in the farm sector and farm prices will decide the push to rural consumption, which is also dependent on the situation of monsoon,” it said adding that some regions are expected to receive less than normal rains, which could prove to be detrimental for crop production.
“If the impact of stress in the non-banking financial company (NBFC) sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending,” it said.
The survey suggested policies to unshackle micro, small and medium enterprises (MSMEs) to grow, create jobs and enhance productivity. It also called for reorienting policies to promote young firms which have the potential to become big, rather than MSME firms which remain small.
The survey flagged the need to prepare for the ageing of the population, necessitating more healthcare investment and raising the retirement age in a phased manner.
Highlighting the immense potential of data of societal interest, the survey said data should be “of the people, by the people, for the people”.
Stating that low pay and wage inequality remain serious obstacles towards achieving inclusive growth, it called for legal reforms, policy consistency, efficient labour markets and use of technology focus areas.
Contract enforcement, it said, remains the biggest constraint to improving Ease of Doing Business ranking.
