Economic Survey 2018: The Economic Survey for FY18 certainly has a more bullish undertone than the previous two surveys, as it expects growth to pick up with greater stability in GST, and likely recovery in investments and exports. The Survey’s projections of real GDP growth at 6.75% in FY18 and 7.0-7.5% in FY19 reflect its growing confidence in India’s current policy mix that focuses on stabilising the GST regime, completing the TBS (Twin Balance Sheet) actions, pushing for privatisation of Air India and prompt corrective response to ward off threats to macro-economic stability. Yet, it warns of two major risks on the horizon — persistence of high international oil prices and a sharp correction in elevated stock prices — both of which have huge potential to slow down India’s growth engine. Interestingly, the Survey points out many risk-return tradeoffs associated in economic situations and policies. For instance, when markets expect rapid growth, stock prices surge leading to more optimism and wealth creation, but bond yields also harden creating negative incentives for investment and growth. Such dualities of revival and risks are observed in other economic situations as well.
For example, in the second half of FY18, India witnessed decent signs of economic revival on the back of increasing industrial production and exports but these were tinged with macro-economic concerns as fiscal deficit, current account deficit and inflation were all higher than expected, partly contributed by high international oil prices but partly by government’s measures to prop up growth.
Similarly, while both competitive exchange rates and open capital accounts are helpful for economic growth, “attracting increasing amount of foreign capital” leads to exchange rate appreciation, which negatively impacts the price competitiveness of exports and hence, growth. Another example was of the measures undertaken to fight corruption and weak governance. While demonetisation and GST have economic benefits, they negatively impacted informal cash-intensive sectors of the economy.
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Similarly, whereas the TBS banned defaulting firms’ promoters from the IBC auctions to minimise moral hazard, it carried the possibility of fewer bidders and lower prices in the auctions of insolvent firms. Based on this, the Survey makes some profound policy prescriptions. It asserts that the policy design should aim at minimising the “economic costs” of policy actions. And for this, there should be greater reliance on “incentives” than on “sticks”; greater focus on addressing the “flow” problem (current policy environment) than the “stock” problem and more reliance on “calibrated” rather than “blunt” instruments (like bans, stock limits, closing down of markets, etc.) The Survey’s take on growth imperatives is also very compelling. It advises policymakers to focus on three pillars of growth from a medium term perspective, notably, education, employment and agriculture taking into account India’s demographic challenges. However, in the current environment it wants policies to focus primarily on private investment and exports. Interestingly, the Survey attaches higher weight to “investments” than to “savings” underscoring the importance of lower real rates of interest for an emerging market economy like India.
Rupa Rege Nitsure – Group chief economist, L&T Financial Services