Economic Survey 2018: The Economic Survey for FY18 tabled in Parliament on Monday predicted India’s FY19 real gross domestic product (GDP) growth in a rather broad range of 7-7.5%, up from a likely, more-closely-read 6.75% in the current financial year, but still below the potential rate of 8% (the Central Statics Office’s advance estimate put FY18 growth at a “conservative” 6.5% recently). A stabilising goods and services tax (GST), the likelihood of a revival of exports — thanks to a “near synchronous” global recovery — and private investments, “the only two truly sustainable (growth) engines”, are what the survey primarily invests its confidence in. The survey, however, tinged its forecast with some variables: For instance, the nature of economic policy in the run-up to the next national election and the possibility of a delay in the return of the private capex cycle if stressed assets are not transferred to stronger ownership. The first of the two-volume survey also warned of the threats of high global crude oil prices and a “sudden stall” in capital flows following a sharp correction in elevated stock prices, both of which could potentially bring India’s growth rate down.
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The actions on the “twin balance sheet problem” (stressed assets resolution under the Insolvency and Bankruptcy Code, recapitalisation of public sector banks) required complementary reform to “shrink unviable banks”, the survey said. It listed the privatisation of Air India and staving off threats to macroeconomic stability also among the next year’s key agenda items for policymakers, who, it said, need to up vigilance. Lauding what it called the GST Council’s “cooperative federalism technology”, the survey said similar mechanisms could be used to create a common agricultural market, integrate the fragmented electricity markets, implement direct benefit transfers and so forth, all long-term policy objectives that have nevertheless remained unfulfilled.
Given the fiscal developments at the Centre and public sector bank recapitalisation to the tune of 0.5% of GDP, “a pause in the general government fiscal consolidation relative to 2016-17 cannot be ruled out” in the current year, the survey said, but noted that bank recap is a below-the-line item that might not affect aggregate demand.
On the fiscal path for FY19, it said that although the narrowing output gap and the resurgence of price pressures demanded a reasonable fiscal consolidation, setting overly ambitious fiscal targets that carry high risks of not being realised in an election year, won’t garner credibility. According to a revised glide path, the Centre’s fiscal deficit was to be contained at 3% of GDP by FY18, but that was not to be, as slower economic growth and demonetisation upset the revenue maths; the deficit is now estimated to be 3.2% in the current year and 3% next year, but it is likely that there could be a modest slippage this year while the jury is still out on whether next year will see a slippage too.
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Overcoming the fiscal vulnerability requires breaking the inertia of the tax-GDP ratio (for the Centre, the ratio has slid from a peak of 12% in FY08 to 10% in FY15 but since gradually improved, to an estimated 11.5% in the current year), according to the survey. It highlighted benefits of GST in terms of increasing the taxpayer base and adding to revenue buoyancy and the rise in personal income tax receipts attributable to demonetisation.
In keeping with the tone in earlier volumes, the latest edition of the survey too was critical of the Reserve Bank of India/monetary policy committee on their policy stance. Stating that India’s monetary conditions “decoupled” from the rest of the world, the survey said since the middle of 2016, while rates fell on an average by 1 percentage point between July and December 2016 in the US, in India, average real interest rates increased by 2.5 percentage points. This, it said, depressed consumption and investments, attracted capital inflows, mostly to debt instruments, causing the rupee to strengthen and, therefore, dampening both net services exports and merchandise trade balance.