Economic Survey 2018: with the date of the release of the Advance Estimates of the GDP by the Central Statistics Office (CSO) having been preponed by about a month, in line with the Union Budget, the importance of the analysis made by the Economic Survey, particularly on the growth forecasts, has risen substantially in the last two years.
While asserting that the level of growth remains below potential, Volume I of the Economic Survey for 2017-18 highlighted that high frequency indicators suggest a robust recovery is taking hold, which is mirrored by ICRA’s findings as well. Building in a rebound in H2, it has pegged the GDP growth for 2017-18 at around 6.75%, higher than the CSO’s advance estimate of 6.5%, but at the lower end of the range of 6.75-7.5% that had been forecast in February 2017. Moreover, the average GDP growth since 2014-15 is estimated at an enviable 7.3%. Looking ahead, the Survey expects GDP growth to accelerate to 7.0-7.5% in 2018-19, benefitting from factors such as higher export growth driven by the expected pickup in the global economy, and the implementation of the proceedings of the Insolvency and Bankruptcy Code. The Survey correctly identifies that there are only two truly sustainable engines of growth, namely private investment and exports. A favourable base effect during H1, healthy private and government consumption, and a back-ended pickup in private investment may boost GDP growth to above 7.0% in FY2019, in ICRA’s view.
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However, sustaining that pace in subsequent years, would require a broad-based investment in infrastructure and capacity addition by the private sector, as well as increasing India’s market share of global exports. The latter may not be easy to achieve, particularly given that the recent pickup in India’s export growth has benefitted from rising commodity prices, and has not solely been driven by a pickup in volumes. Volume II of the Economic Survey for 2016-17 released in August 2017 had explored the question of whether India is undergoing a structural shift toward low inflation. Since then, the CPI inflation has accelerated, printing at a 17-month high 5.2% in December 2017. After stripping away factors such as higher oil prices, unseasonal increases in prices of perishables and the increase in housing inflation based on the rise in House Rent Allowance of Central Government employees, the Survey estimates underlying inflation at a considerably less distressing 4.3% in December 2017. Volume II of the Economic Survey for 2016-17 had stated that geopolitical risks relating to crude oil are not as risky as they were earlier. However, with the acute rebound in fuel prices in the subsequent six months, Volume I of the Economic Survey for 2017-18 has cited elevated crude oil prices as a risk to inflation, the twin deficits as well as economic growth.
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In terms of the outlook for rates, the Survey maintains that policy rates can be expected to remain fairly stable, if inflation doesn’t deviate significantly from the current level.In our view, the dip in average CPI inflation from 2016-17 to 2017-18 is likely to be reversed in 2018-19, amidst continuing volatility in monthly readings.The fiscal deficit targeted in the upcoming budget as well as the reaction of the Monetary Policy Committee in its meeting next week to the recent spike in inflation readings, will provide clues to the outlook for the repo rate as well as bond yields.