Budget 2019: GDP growth will take time to look up, says Crisil chief economist Dharmakirti Joshi

Budget 2019 India: Policymakers are faced with an onerous task today—that of reviving growth in a fiscally-constrained environment. The sub-6% growth in GDP in the last quarter of fiscal 2019, in itself, is not a worry, considering GDP growth has fallen below 6% on seven occasions in the last seven years.

The worry is that, this time around, there is little support from the global economy, no fiscal leeway to fire growth, and constraints on financial sector to lubricate the economy.
We expect GDP growth to start looking up only by the second half of this fiscal. And with the help of good rains and soft oil prices, it can cross the 7% threshold. Else, fiscal 2020 will be the second consecutive year of sub-7% growth.

The Budget had little legroom to expand the fiscal deficit further and has targeted fiscal deficit at a marginally 3.3% of GDP, versus 3.4% in the Interim Budget. A lower fiscal deficit target will have a positive spinoff effect via other channels—it will reduce the borrowing cost for the government and create conditions for RBI to continue with its soft interest rate stance. The government bond yields immediately softened on this news.

We expect growth in fiscal 2020 to be consumption-oriented. Interest rate cuts from RBI and more money in the hands of the poor via budgetary provisions will help prop up consumption demand more than investments in the near term.
The government will have to continue the heavy-lifting on investments with greater dependence on extra-budgetary funding. The role of the states, which account for two-thirds of public investments, will be critical.

A revival in private investments will have to wait. Despite improving capacity utilisation, capacity overhang persists in some segments. The sharper-than-expected slowdown in growth will postpone a decisive lift in private investment this fiscal.

More than interest rates, the expected return on investments matter for private investment decisions. This will take some time to improve. The focus on reviving the manufacturing sector by attracting foreign investment in sunrise areas should pay off over the medium run.

The Budget announced growth capital to banks via a fresh round of recapitalisation of PSBs. Making these transfers merit-based will help create a resilient banking system.

(The author is Chief Economist, CRISIL)