Economic Survey 2018: Driven by strong investment and exports growth, the Economic Survey estimates a real growth of 7.5% in 2HFY18, maintaining this momentum in FY19 with growth in the range of 7%-7.5% and touching the potential of 8% in the medium term. These estimates broadly corroborate with the corresponding estimates by the IMF and the World Bank. With the realisation of such robust growth rates, India is poised to re-emerge as the global growth leader. A major constraint is whether the firming up of global crude prices would push up the value of imports thereby neutralising the positive export outlook, implying that the contribution of net exports to GDP growth might continue to be negative.
The Survey cautions about the possibility of a marginal slippage in fiscal consolidation in FY18 but assures restoration of the consolidation path in the next fiscal. The main reasons for possible slippage are not only the underachievement of budgeted targets both for tax and non-tax revenues but also the inclusion of `80,000 crore provided for public sector banks’ recapitalization in the FY18 fiscal deficit. One mitigating factor is that disinvestment proceeds might exceed the budgeted target. Further, there may be some downward adjustment on the expenditure side. However for FY19, several positive factors might uplift government revenues significantly.
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First, there is an expected increase in direct tax buoyancy as the formalisation of the economy improves and the number of income tax payers increases further. Second, GST would have stabilised by the next year. Third, the RBI’s position regarding its dividends to the government would have normalised as against a severe dip in FY18. Fourth, the government has plans to embark upon an ambitious disinvestment target. Finally, with inflation expected at about 4.5% and real growth at about 7.5%, nominal growth in FY19 is likely to exceed 12%, resulting in a tax revenue growth of more than 18% even if a conservative buoyancy of 1.5 is assumed.
Thus restoration of fiscal deficit target of 3% of GDP for FY19 seems very much on cards.
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Regarding policy outlook for FY19, the Survey refers to factors such as the next national elections and high oil prices. With global crude prices firming up, the Reserve Bank of India is likely to see upside risks to inflation and hence monetary stimulus may not be forthcoming in the near future. Fiscal policy will remain constrained by the fiscal deficit target of 3% of GDP. Much will depend on the structure of government expenditure and the extent to which it can be restructured in favour of sectors characterised by high multiplier effects and positive impact
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on employment such as infrastructure, construction and manufacturing. The Survey observes that in the light of the overall economic and political background, if pitfalls such as fiscal expansion are avoided, it would be ‘no mean achievement’ implying that excessive reliance on fiscal stimulus may also be ruled out. Given the rural and agricultural distress, the government may announce in the forthcoming Budget, both budgetary and policy commitments for agriculture but the budgetary cost of these is expected to be within limits.
(Views expressed are personal)