As the September-quarter saw the Indian economy looking up after being caught long in a vortex of low investments and debilitating (negative) “net-exports,” the Narendra Modi government is agog about 2018: It will likely summon all its might to decisively lift growth and dissipate the lingering notion that the economy continues to be buffeted by the Goods and Services Tax’s transitional pains and the aftershocks of demonetisation. What adds to the policymakers’ confidence is that most high-frequency indicators have of late pointed to a strengthening of the recovery in December quarter, aided, quite encouragingly, by external and investment demands, the ones most in demand.
The Centre could, however, allow fiscal slippages in both FY18 and FY19 in order to keep public spending somewhat robust.
The slippage could be of some 30 basis points relative to the GDP against FY18’s targeted fiscal deficit of 3.2%; few would be surprised if the stated glide path to have a only 3% deficit in FY19 is ultimately deviated too, although finance minister Arun Jaitley might choose not to concede it in the coming budget.
Economists and public-policy analysts, who FE spoke to, were unanimous that the second-half of FY18 will witness GDP growth much higher than the average of 6% reported in H1. However, not everyone is sure of an H2 expansion of 7.5%, which is required for the forecasts of the government (6.75-7.5%), RBI (GVA, 6.7%) and IMF (6.7%) to hold good.
DK Joshi, chief economist at Crisil, said, “I expect GDP to grow 6.8% in FY18 and 7.6% in FY19. Front-loaded recapitalisation of public sector banks will also improve their ability to lend when the economy gathers pace. That, and the low-base effect of (growth) this fiscal and a step-up in world growth can lift India’s boat to 7.6% in 2018-19.”
After falling for five successive quarters from 9% in Q4FY16 to a low of 5.7% in 1QFY18, GDP growth at 6.3% in Q2FY18 reversed trend. A much-awaited pick-up in manufacturing was the main driver of growth in Q2FY18 but the period also saw a buttressing of sequential improvement of real investments in fixed assets to register a heartening 4.7% annual increase and lower negative contribution of net exports to growth. Sonal Varma, managing director and chief India economist at ·Nomura, wrote: “Incrementally, investment and external demand are what gained momentum in the October-December period. Investment proxies (capital goods production, railway traffic) suggest the September quarter pick-up in fixed investment growth should strengthen further in the December quarter.”
According to DK Srivastava, chief policy adviser at EY, there are clear signs that growth numbers might progressively climb up from now onwards “with the effects of demonetisation and the transition hiccups of the GST firmly behind us”. Within GDP growth numbers, a very encouraging sign, he said, is that while export growth has remained positive, import growth has fallen, enabling a reduction in the negative contribution of “net exports” to GDP growth in 2QFY18.
Friday’s Controller General of Accounts data showed that the Centre’s fiscal and revenue deficits in April-November stood at 112% and 152% respectively of the annual budgeted targets. In the light of this, it is rather clear that despite large revenue mobilisations expected from disinvestment and PSU dividends over the next three months, some moderation of the expenditure, including the capex variety, would be necessary for fiscal deficit not to exceed 3.5% of GDP in FY18. Budgeted capital expenditure in April-November stood at `1.84 lakh crore, 59.5% of the target for FY18 and slightly above the corresponding pace (57.7%) last year. However, the momentum of public spending may not be allowed to falter – last fiscal year’s accelerated PSU capex drive will likely be sustained in the current year and to an extent, the next.
The challenge to the fiscal deficit target also emanates from the increased chances of nominal GDP growth in FY18 being lower than the budgeted 11.5% or 11% (after base revision) required for it to have neutral impact on deficit expressed in relation to GDP. Considering that the H1 nominal GDP expansion was just 9.3%, the second half growth needs to be 12.4% for it not to impact the deficit ratio. Even with the Reserve Bank of India raising
CPI-based inflation forecast for the second half of this fiscal to 4.3-4.7% range, a 12.4% increase in nominal GDP looks distant.
While a slowing of the growth in private final consumption expenditure (PFCE), the principal engine of the economy, over the first and second quarters of the current fiscal year is a cause for concern along with a slowing of some service sectors, Varma notes that, “Consumption – both urban (vehicle sales, diesel consumption) and rural (two-wheeler, tractor sales) remains robust.. but there was a marginal moderation in the December quarter from the previous one.” PFCE growth had slowed from 11.1% in Q3FY17 to 7.3% in Q4 and further to 6.7% in Q1FY18 and 6.5% in Q2.
As the economic outlook is generally tending to be more sanguine, there are certain worry factors too. “Even as demand-side indicators strengthen, the supply-side appears slow to catch up. Industrial sector data for October are weaker. Services are more mixed, with higher transportation services but still-weak financial services (higher credit growth but weaker deposit growth). The strong pick-up in import volumes suggests some of the increased demand is seeping overseas,” Varma noted. Also, area sown under Rabi (winter crop) was down 1.3% y-o-y as on December 8, 2017.
Further, retail inflation that hit 1.46% in June, the lowest in the current series, since inched up consistently to touch a 15-month high of 4.88% in November. The minutes of the December meeting of the monetary policy committee (MPC) suggest most members saw upside risks to inflation arising from higher oil prices, rising input costs that could feed through to higher output prices, fiscal slippage and higher inflation expectations. In fact, half the members thought inflation was likely to stay above the 4% target in the medium term. Still, five of the six members of the panel voted to maintain maintain status stay due to risks to growth, especially in view of low capacity utilisation, weak consumer confidence and lower investments. Aditi Nayar, principal economist at Icra, said: “While elevated commodity prices and the impact of state and central government pay and house rent allowance revision would continue to push up inflation, their impact would be counteracted to an extent by the eventual correction in vegetable prices, the pass through of lower GST rates and the base effect related to the HRA revision for central government employees