Economic Survey: Government Sees FY19 Growth At 7-7.5%

Economic Survey does not rule out deviation from the stated path of fiscal consolidation.

North Block of the Central Secretariat building in New Delhi, which houses the Ministry of Finance. (Photographer: Prashanth Vishwanathan/Bloomberg)
North Block of the Central Secretariat building in New Delhi, which houses the Ministry of Finance. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Indian government’s Economic Survey for 2017-18 expects a pick-up in growth in the coming year and leaves room for a deviation from the stated path of fiscal consolidation. The Economic Survey pegs growth at 7-7.5 percent in 2018-19 compared to an estimated 6.75 percent in the current year.

“A series of major reforms undertaken over the past year will allow real GDP growth to reach 6.75 percent this fiscal and will rise to 7.0 to 7.5 percent in 2018-19, thereby re-instating India as the world‘s fastest growing major economy,” said the survey.

According to the survey, private investment is poised to rebound should resolution of stressed assets and recapitalisation of banks proceed as expected. If this progress gets delayed, the private capex cycle may take longer to pick up, cautioned the survey.

Consumption demand will encounter different tugs, said the survey. On the positive side, it will be helped by the likely reduction in real interest rates in 2018-19 compared to 2017-18. On the flip side, higher oil prices, if passed on to end consumers, could crimp real incomes and spending. “And if higher oil prices require tighter monetary policy to meet the inflation target, real interest rates could exert a drag on consumption,” the survey said.

According to advance estimates released by the Central Statistical Office, GDP growth in 2017-18 will settle at 6.5 percent, the lowest in four years. However, quarterly GDP data and high frequency indicators suggest that growth bottomed out in the second quarter of the year. Data points, such as the manufacturing PMI, suggest a pick-up in the October-December quarter. An improvement in bank credit growth, which rose to 12 percent in January, also points to some revival in the economic activity.

Fiscal Concerns

The survey acknowledged that a pause in the fiscal deficit process cannot be ruled out in 2017-18.

“Reflecting largely fiscal developments at the center, a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out. In addition, the measured deficit for 2017-18 will include Rs. 80,000 crore (0.5 percent of GDP) in capital provided to public sector banks,” said the survey. It added that this will not affect aggregate demand as it would be deemed as financing (“below-the-line”) rather than expenditure.

A key policy question will be the fiscal path for the coming year. Given the imperative of establishing credibility after this year, given the improved outlook for growth (and hence narrowing of the output gap), and given the resurgence of price pressures, fiscal policy should ideally have targeted a reasonable fiscal consolidation. However, setting overly ambitious targets for consolidation—especially in a pre-election year—based on optimistic forecasts that carry a high risk of not being realized will not garner credibility either. Pragmatically steering between these extremes would suggest the following: a modest consolidation that credibly signals a return to the path of gradual but steady fiscal deficit reductions.
Economic Survey For 2017-18

The government is widely expected to miss its fiscal deficit target of 3.2 percent of GDP for 2017-18 due to a shortfall in indirect tax revenues following the implementation of the Goods and Services Tax. In a note dated Jan. 19, Credit Suisse said it estimates a shortfall of Rs 90,000 crore in receipts in 2017-18. The brokerage, however, also expects the government expenditure to be 3 percent lower than budgeted. On balance, the fiscal deficit is expected to settle at 3.4 percent in FY18 and 3.2 percent in FY19, it said.

The Government’s Agenda

The survey noted that the government’s agenda will be full in the coming year. On the agenda will be:

  • Resolving major indebted cases to ensure recapitalising the public sector banks is carried to a successful conclusion.
  • Initiating reforms of the public sector banks that will credibly shrink the unviable ones and signal greater private sector participation in the future.
  • The government will also need to stabilise GST implementation to remove uncertainty for exporters, facilitate easier compliance, and expand the tax base
  • Privatise Air India
  • Stave off any nascent threats to macroeconomic stability, notably from persistently high oil prices, and sharp, disruptive corrections to elevated asset prices.