India may at best match this year’s growth rate in 2016-17

The government harped on India retaining its place as the fastest-growing major economy in the world amidst global headwinds while calibrating the growth expectation for 2016-17 to a 7-7.75 per cent range, as per the annual Economic Survey released by finance minister Arun Jaitley on Friday.

The forecast means that the Indian economy will, at best, just surpass the projected growth of 7.6 per cent in 2015-16. The year-ago survey had projected growth in the 8.1-8.5 per cent range this year but the actual number has undershot this level as business revival failed to gather steam.

The survey said conditions do exist for raising the growth rate to 8 per cent or more in the next couple of years but warned of three significant risks.

It said that turmoil in the global economy could worsen the outlook for exports and tighten financial conditions significantly. The poor state of the global economy has already hurt India’s exports, which make up about a fifth of the local economy.

The survey noted also that, any sharp upside in oil prices, contrary to expectations, would increase the drag from consumption, both directly and owing to reduced prospects for monetary easing.

“Finally, the most serious risk is a combination of the above two factors. This could arise if oil markets are dominated by supply-related factors such as agreements to restrict output by the major producers,” the survey said.

Fiscal consolidation

The survey posed some critical notes on the fiscal consolidation path. Invoking the Greek mythology of Scylla and Charybdis to point out how the fiscal policy is a tightrope walk, it said there are good arguments for a strategy of aggressive fiscal consolidation, as earlier envisaged, and equally good arguments for moderate consolidation that can avoid a major negative demand shock to a still-fragile recovery.

The survey said time is ripe for a review of the medium-term fiscal framework

It said that India’s debt-to-GDP ratio is higher than other countries with similar credit ratings and so curtailing it is seen as important, especially after the public expenditure binge in 2008-09 to revive the economy ballooned the fiscal deficit level.

This would be seen as sticking to its commitment and thereby improve the government's credibility in the eyes of the world. Indeed, with gross domestic product growing above 7 per cent, one may have to make a strong case to abandon the fiscal deficit target of 3.5 per cent of GDP in 2016-17.

But it noted that the implementation of the Seventh Pay Commission’s recommendations would push up the government’s wage bill and that public investment may need to be increased further to fix the country’s creaky infrastructure.

“Taking these factors into account, the Centre’s deficit could swell substantially. As a result, achieving the original could prove difficult unless there are tax increases or cuts in expenditures,” it said.

The survey said there is some scope to increase receipts from disinvestment and spectrum auctions but the desirability of a strategy of aggressive fiscal consolidation could be questioned.

“This is because the current environment is fraught with risks, which threaten all the engines of India’s growth,” it said.

However, if the deficit target is loosened, it may affect interest rates in the economy. But the survey argued that the impact on inflation is expected to be minimal if the deficit target is relaxed a bit.

It talked of how reducing fiscal deficit by 0.2-0.3 percentage points of GDP (as against 0.4 per cent planned for 2016-17) may be a more prudent approach. This sends a signal that the government may relax the fiscal deficit target for next year in the Union Budget.

The survey said the Budget will carefully assess these options and time is ripe for a review of the medium-term fiscal framework. “A medium-term perspective to expenditure planning is necessary,” it added.

Weak balance sheets

The survey highlighted the 'twin balance sheet' problem of bad loans, which have crimped bank lending, and a debt pileup on corporate balance sheets as one of the main roadblocks to higher growth.

“The situation is not sustainable; a decisive solution is needed,” it said and suggested a four-pronged strategy.

“Banks must value their assets close to true value (recognition). Their capital position must be safeguarded via infusions of equity (recapitalisation). The NPAs in the corporate sector must be sold (resolution). And future incentives for the private sector and corporate must be set right to avoid repetition of the problem (reform),” it said.

The survey highlighted the problem of bad loans at banks and a debt pileup on corporate balance sheets

Some steps have already been taken with the government launching the Indradhanush scheme for phased recapitalisation of public-sector banks. The Reserve Bank of India has also initiated schemes such as the Strategic Debt Restructuring programme to encourage banks to rehabilitate stressed assets.

Sector-wise analysis

The survey said growth in the services sector moderated slightly but remains robust. The sector contributed about 69 per cent to total growth from 2011-12 to 2015-16 and, in the process, expanded its share in the economy to 53 per cent from 49 per cent.

Growth in industry is estimated to have accelerated this fiscal year due to improving manufacturing activity. Manufacturing production grew 3.1 per cent during April-December 2015-16 compared with 1.8 per cent a year earlier.

Apart from manufacturing, the other three segments of the industry sector--electricity, gas, water supply and related utilities; mining and quarrying; and construction activities--are showing a deceleration in growth.

Farm growth sector in 2015-16 has remained lower than the average of the last decade due to deficit rainfall for a second successive year. Production of foodgrains and oilseeds is estimated to fall 0.5 per cent and 4.1 per cent respectively, while fruits and vegetables output is likely to increase marginally. The allied sectors of livestock products, forestry and fisheries are likely to grow over 5 per cent in 2015-16, which will provide some impetus to rural incomes.

The survey rested its hopes on a better monsoon this year. El Nino, a weather phenomenon that affects farm output in India, was the strongest in 2015 since 1997. The survey noted that some of the strongest El Nino years were followed by La Nina episodes, resulting in bumper harvests. “This kind of possibility cannot be ruled out in 2016 as well,” it said. 

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