The first part of the Economic Survey had forecast GDP growth at between 6.75-7.5%, but the second volume suggests it could come in closer to the lower end of the band.
With a third of the year already over, it is apparent the economy will grow at way below its potential in FY18. The first part of the Economic Survey had forecast GDP growth at between 6.75-7.5%, but the second volume suggests it could come in closer to the lower end of the band. That is decidedly disappointing. With global growth picking up, inflation at record lows and interest rates starting to trend down, the environment appears to be more than encouraging. However, a clutch of factors are queering the pitch, from lower real farm incomes, farm loan waivers, transitional troubles from the rollout of the GST, a strengthening currency and profitability pressures in the telecom and power sectors. To fix these, a larger set of reforms will be needed than those that are in place right now.
Indeed, corporate results for the June quarter reflect how pre-GST destocking has hurt sales across a host of consumer goods and pharmaceuticals companies. However, the re-stocking process seems to have begun and inventories should normalise in the next few months. The bigger worry is that there is little sign of private sector capex picking up. Since states that write off farm loans will need to prune expenditure to ensure they stay fiscally prudent, this could hurt investments. Moreover, not only will the expenditure cuts depress demand, states with fiscal room will end up borrowing more which, in turn, will crowd out private sector spending. This means the Union government must continue to spend; between April and June, central capex (excluding loan repayments) has more than doubled year-on-year and the tempo needs to be maintained.
But, as the Survey points out, for a larger revival, the twin balance-sheet problem needs to be addressed before banks start lending again. The process has been kick-started, and banks have now referred a dozen big companies to the insolvency court. However, a larger set of problems have now arisen, with a big chunk of the power sector exposure becoming vulnerable to default. The Survey estimates that around half of the generation capacity in the private sector is unviable since it operates at a PLF of below 60%. And with a host of discoms looking to renegotiate tariffs, unmindful of reneging on existing PPAs, there could be more trouble. Unless there is a way to enforce contracts or rework them in such a manner that neither buyers nor sellers lose out too much, more capacity could end up becoming unviable.
There is also the looming threat of telecom exposure turning toxic, and to ensure telcos don’t bleed any further, the government must slash licence fees—all evidence so far suggests this will not be done. Without strong balance-sheets, banks will be severely limited in their ability to both lower interest rates and to lend.
While loan waivers should make some farmers wealthier, most farmers are not getting a good price for their produce. Indeed, with restricted markets, inadequate storage and unfriendly government policies, as has just been seen in the case of onions and tomatoes, a bumper crop has resulted in a complete collapse in prices. Unless the government goes in for major agriculture reforms, it is difficult to see how this boom-bust cycle is to be fixed. Restrictive labour laws, similarly, continue to keep enterprises small and, in turn, affect job creation and even exports.
Without more purchasing power with households, and little to boost industrial growth, it will be difficult to get the economy to grow at more than 7-7.5% over the medium-term.