India's economic growth in real terms will hit a four-year trough of 6.5% this fiscal while its nominal gross domestic product (GDP) will expand at the slowest pace since 2012-13, the Central Statistics Office (CSO) forecast on Friday, worsening fears about a possible fiscal slippage.
India’s economic growth in real terms will hit a four-year trough of 6.5% this fiscal while its nominal gross domestic product (GDP) will expand at the slowest pace since 2012-13, the Central Statistics Office (CSO) forecast on Friday, worsening fears about a possible fiscal slippage. Even assuming revenue projections are met, the 9.5% nominal growth forecast by the CSO will per se warrant a spending cut of Rs 14,449 crore from the budgeted level of almost Rs 5.47 lakh crore should the government wish to stick to its fiscal deficit target of 3.2% of nominal GDP for 2017-18. Since fiscal deficit has hit 112% of the full-year target in just eight months of 2017-18 while expenditure touched 69% of the budget estimate, the spending momentum may slow down considerably in the remaining months of the fiscal. Although the CSO forecast a 6.1% expansion in gross value added (GVA) for 2017-18, again a four-year low, what surprised analysts was the wide gap of 40 basis points between the GVA and GDP growth projections, given faltering goods and services tax (GST) collections. (Higher taxes inflate the GDP which is GVA plus indirect taxes minus production subsidies). Chief statistician TCA Anant said the forecast assumes the government will achieve the budgeted level of indirect tax collections.
For the wide gap between the GDP and GVA to come true, indirect tax mop-up will have to rise substantially in the coming months or the government will have to cut spending and delay subsidy payments. Since a cut in revenue spending is more difficult, a reduction in capital expenditure could be the adverse fallout of slowing growth if the government still wants to maintain the targeted fiscal glide path.
Analysts, however, pointed out that since the CSO projections have been firmed up on hard data up to Q2 only in many cases (in case of IIP and some others, data up to October were captured) and considering that the growth in the last two quarters were among the worst in recent years, a full-year projection based on that appears to be conservative. Real GDP growth is projected at 7% for the second half of this fiscal, compared with 6% in the first half. The advance estimate has not factored in latest rebound in some high frequency indicators — manufacturing PMI scaled a five-year high in December and services PMI recovered from a contraction; exports rose as much as 18.4% in November.
More solid data, as and when available, will capture the latest trends and may drive up GDP growth beyond the projected level, analysts said. With the residual impact of demonetisation almost behind us and the GST issues being settled fast, the analysts expect growth to pick up fast from Q3 itself, thanks partly to a favourable base as well. The government may nudge central PSUs to step up their capital spending from the targeted level of Rs 3.85 lakh crore to somewhat offset any possible cut in the Centre’s own expenditure. Budget capex in October 2017 was around Rs 16,000 crore, down from a monthly average of over Rs 24,000 crore in the first half of the fiscal year. Already, growth in government final consumption expenditure is expected to slow to 8.5% in the current fiscal, against 20.8% a year earlier.
Among the aggregate drivers of growth, the principal one, namely private consumption, continued its tendency of losing GDP share and “net exports”, despite a very modest year-on-year increase in Q2, still had a negative effect on growth. Even private final consumption expenditure, a key driver of growth in recent years, lost some pace and is expected to expand only 6.3% in 2017-18, compared with 8.7% a year before. Gross fixed capital formation, however, is expected to grow 4.5% this fiscal, compared with 2.4% last year. The Centre’s subsidy payment is hovering around the levels of last year. It touched 86% of its full-year target by November, against 85% a year before. Last year, it had rolled over subsidy dues of Rs 1 lakh crore and a similar amount as arrears could be carried forward this year.
“The GST transition impact is clearly visible,” said Shubhada Rao, chief economist at Yes Bank. Sectors such as manufacturing and hotels were badly hit, she said. “Given the recent uptick in inflation pressure and with inflation likely to remain around 5% going ahead, we expect the RBI to be on hold with a guarded stance even though growth estimate has disappointed slightly,” Rao said. The CSO’s GVA growth projection is much lower than the RBI’s forecast of 6.7% for the current fiscal.
Manufacturing is now forecast to grow 4.6% this fiscal year, against 7.9% in the previous year. Farm output will likely slow to 2.1% from 4.9%, mainly due to an unfavourable base. The data also showed India’s per capita income will likely witness a slower growth of 8.3% at Rs 1,11,782 in 2017-18, against 9.7% a year earlier. NITI Aayog vice-chairman Rajiv Kumar said the economic activity is expected to strengthen in the coming quarters and GDP growth will become more robust in 2018-19. He added that the estimates assume significance in the wake of the fact that the higher second-half growth has come despite a weaning of public sector expenditures, which had peaked in 2016-17, on account of the implementation of the Seventh Pay panel recommendations.
Aditi Nayar, principal economist at Icra, said the healthy uptick in volumes displayed by many sectors in November 2017 is expected to strengthen in the remainder of FY18, benefiting from a favourable base effect and a “catch-up” following the subdued first half. “Accordingly, manufacturing is likely to display healthy expansion in volumes in H2 FY18, which should result in a substantial improvement in capacity utilisation,” she said. However, elevated commodity prices, especially fuel prices, could inflate input costs, exerting pressure on manufacturing margins, she added.