Turning away from the usual presentation steeped in forward looking optimism, this year’s Economic Survey presents the narrative based on pragmatism and grassroots realities.
It clearly says that while low private investment spending kept India’s real growth in the first half of FY2017 on the weaker side of its own last year’s projection, the combined effect of demonetisation and the US election results may lower India’s real growth for the full FY2017 by ¼ to ½ percentage point relative to its baseline estimate of 7%.
Moreover, the recorded GDP growth in second half of FY2017 will understate the overall impact of demonetisation, as the most affected parts of the economy are informal and cash-based belts, which are not accurately captured in the national income accounts. On the positive, weakness in growth will ensure that CPI inflation will remain below the RBI target of 5%.
Revival of economic growth in FY2018 hinges on revival of four components of aggregate demand, notably consumption, private investment, government and exports. While exports growth will be driven by global economic growth, private investment is unlikely to recover significantly in FY2018 in view of the ongoing balance sheet stresses in the corporate and banking sectors. Some of the weaknesses in private investment could be offset by higher public spending, but that too would be constrained by the government’s firm commitment to fiscal discipline. This means the onus will fall on “private consumption”, which may receive boost from two sources – first, the ongoing remonetisation process and cheaper borrowing costs in 2017.
Interestingly, the Survey is evidently hinting at sizeable monetary easing in FY2018 – of the order of 75 bps to 100 bps in 2017 compared to 2016. Even after factoring in this magnitude of monetary easing, the Survey expects real growth in FY2018 to stay in the band of 6.75% to 7.5% in FY2018 – much toned down from its previously held growth expectations. Furthermore, this “projection” would also face downside risks from three factors – the “magnitude” of the lingering effect of demonetisation, emerging trajectory of global crude oil prices and trade tensions amongst the major countries (Trump effect).
While the Survey wants “monetary easing” to provide the much-needed stimulus to growth in FY2018, it has warned that any sharp uptick in oil or farm product prices would limit the scope for the same.
Also, the Survey is not much confident about the fiscal outlook for next year, as it would depend on a sizeable increase in tax revenue (which may suffer a setback if oil windfall disappears), uncertainty about the magnitude of fiscal bounty arising from “demonetisation” (which will also be one-off in nature & not sustainable) and effective implementation of the GST.
The Survey has realistically discussed the administrative and technological challenges involved in the process of GST implementation and warned that the fiscal gains from both the GST and demonetisation will take a longer time to be fully realised. Factors like muted non-tax revenues and pending “allowances” under the Seventh Pay Commission could add to fiscal pressures.
In nutshell, the Economic Survey expects India to settle at a lower equilibrium level in FY2018 partly due to the lingering impact of radical policy measures undertaken in FY2017 and partly due to an uncertain global environment (created by normalisation of US monetary policy, oil prices & trade wars amongst the major countries).
The strongly positive feature of this year’s Survey is that it has addressed several sensitive issues relating to India’s growing reputation as one of the most unequal countries in the world.
Group chief economist, L&T Financial Services