At 8.1-8.5% in FY16, to be driven by ‘dramatic’ macro numbers
India could finally be launched on a double-digit medium-term growth trajectory helped by a creative and abiding incrementalism in policy making that could have the effect of big-bang reforms, according to the authors of the Economic Survey 2014-15 tabled in Parliament on Friday.
Stating that macroeconomic fundamentals have “dramatically improved”, the survey called for a balancing of the short-term imperative of boosting public investment with the need to maintain fiscal discipline. Essentially, the survey writers, led by chief economic adviser in the finance ministry Arvind Subramanian, advocated, in a slight tempering of a more explicit pro-public-investment stance taken in December’s mid-year analysis report , a (public) “expenditure switching” from consumption to investment, sans a reliance on government borrowings.
Accepting the “somewhat puzzling” reformulation of economic data by the Central Statistics Office (CSO) recently, Subramanian and his team upgraded, rather unconvincingly, the short-term growth forecasts for the economy: Real GDP expansion of 8.5% in FY16 was in the realm of possibility, they said, projecting a band of 8.1-8.5%. The mid-year review, it may be recalled, had said FY15 GDP growth could remain on the lower side of an earlier-predicted range of 5.4-5.9%.
The more sanguine growth estimates in the latest survey is “in the light of the government’s commitment to reforms, improvements in the price and external-sector scenarios” including a continuance of the benign oil prices, “better prospects” in the world economy and assuming a normal monsoon and a likely monetary policy easing facilitated by lower inflation and tamed inflationary expectations.
Some economists found these presumptions a bit hazardous, though.
Even as world economic growth is predicted to rise moderately to 3.7% in 2016 from 3.5% in 2015 as per the International Monetary Fund, this is seen to be inadequate to take India’s export growth to double-digit levels for next fiscal, especially given that export growth turned negative since the second quarter of this fiscal and overall growth for the year is seen at just 0.9%.
The projected margin of increase in growth of 0.7 to 1.1 percentage point (given that the growth this year is estimated to be 7.4% by the CSO) is too big to be believed, analysts said, citing the bleak investment scenario that doesn’t seem to favour a sudden sharp turnaround and produce the level of incremental economic growth foreseen in the survey. In fact, the survey authors themselves are not oblivious to this: “The balance sheet syndrome with Indian characteristics creates a web of difficult challenges that could hold back private investment.”
Predicting a monetary easing, the survey said: “Structural shift in the inflationary process are underway caused by lower oil prices and deceleration in agriculture prices and wages. These are simultaneously being reflected in dramatically improved household inflation expectations. The economy is likely to over-perform on the RBI’s inflation target by about 0.5-1 percentage points, opening up the space for further monetary easing.”
With an erosion in revenue buoyancy, the expenditure reforms proposed in the survey and the benefit of a hopefully prolonged period of low oil prices on the government finances are insufficient to create the fiscal room needed to pep up investments to the level required for the medium-term double-digit growth predicted.
Explaining in detail how a large part of the subsidies don’t benefit the poor, the survey pitched for their optimal utilisation. “Even though price subsidies, estimated at Rs 3.78 lakh crore or 4.24% of the GDP, may have helped poor households to weather inflation, they were ‘not the best weapon’ to fight poverty and are often regressive, the survey said, adding that the JAM Number Trinity — Jan Dhan Yojana, Aadhaar and Mobile numbers — would facilitate better-targeted delivery of subsidy. Endorsing the recommendations of the high-level committee on reforming the public distribution system, the survey mooted a national common market for commodities enabled by a constitutional change.
The stock of stalled projects at the end of December 2014 stood at a staggering Rs 8.8 lakh crore (7% of GDP), the survey said, arguing for expediting reforms in bankruptcy procedures through a separate law.
Observing that the economic scenario presented by the CSO’s new series (with FY12 as the base year) showed perceptible improvements in some of the macroeconomic aggregators of the economy in FY14 that strengthened in FY15, the survey sought to explain the reasons for huge revisions in growth rates for the last two financial years. “One of the reasons why the real GDP growth rate for 2013-14 appears to be strong is the lower GDP level in FY12 and FY13 along with lower GDP deflators than were though hitherto.”
Radhika Rao, economist at DBS, Singapore, said: “One needs to note the nominal GDP rate in tomorrow’s Budget. Even if the growth projections are upbeat, lower GDP deflator will bring down the nominal growth rate. The latter needs to be reflected in the revenue and expenditure projections to ensure these are realistic. Over time, reliance on privatisation receipts needs to be lowered.”
Consumer inflation in FY16 is likely to range between 5% and 5.5%, below the Reserve Bank of India’s target by 0.5 to 1 percentage point, according to the survey, which also predicted that the current account deficit would be a benign 1% of GDP in FY16. The Centre must meet its medium-term fiscal deficit target of 3% of GDP, it said.
It also bore out cooperative federalism, a pet theme of the Narendra Modi government, and described the Fourteenth Finance Commission’s award as a watershed for federalism and public finances. “Not only are many of the levers of power vertically dispersed, (as is) reflected in the power of the states, policymaking has also become dispersed horizontally,” it said.
The sweet spot
* ‘Big bang’ reforms can propel India to double-digit growth trajectory
* CAD to decline to 1% of GDP in 2015-16
* Govt to stick to fiscal deficit target of 4.1% of GDP in FY15 and 3% in medium term
* Lower inflation frees space for monetary easing
* Labour, capital, land, market reforms & skills to be growth engines
* Revitalise PPP model to revive investment
* ‘JAM Trinity’ to help fund transfer to poor sans leakage
* Shield domestic industry to promote ‘Make In India’
* Borrowings for investment, not for meeting expenses
* 4Ds—deregulation, differentiation, diversification, disinter (better bankruptcy laws)—for financial sector growth