India to grow 6-6.5% next year: Eco Survey
Survey calls for reforms, demand boost; warns deficit may not be reined in
NEW DELHI: The Indian economy, which has been caught in a sixquarter deceleration, is already in a revival phase and GDP growth will increase to 6-6.5% from the current level in the next fiscal year, according to the Economic Survey for 2019-2020, presented on Friday, a day ahead of the Union Budget for 2020-21.
Interestingly, growth data released by the ministry of statistics a few hours after the survey was tabled in Parliament, said that the Indian economy grew at a slower pace than previously estimated last year (2018-19). It reduced GDP growth in 2018-19 to 6.1% from the provisional estimate of 6.8%. Provisional estimates use a so-called benchmark indicator method; the first revised estimates (the ones for 2018-19 were released on Friday) use detailed information from the ministry of corporate affairs’ database. To be sure, this revision will mean recalculation of at least the growth rate for this year and the estimated growth for next year in the Economic Survey. For instance, HT’s calculation shows that growth for 2019-20 will now be 5.7% against the previously estimated 5% because last year’s base has now shrunk.
That 6-6.5% growth projection for next year “may prove to be optimistic unless backed by a strong fiscal stimulus in the forthcoming Budget and the meeting of investment targets specified in the NIP both by the central and state governments,” said DK Srivastava, chief policy adviser, EY India.
His reference is to the National Infrastructure Pipeline. The government had on December 31, 2019, unveiled the ~102 lakh crore capital expenditure plan in infrastructure sectors between 2019-25. In the interests of growth, the survey suggests a slippage of the fiscal deficit in 2019-2020 and according to Srivastava, “this may be necessary even in FY21 due to the urgent need for reviving growth”.
According to the Economic
Survey, the ongoing slowdown was a result of a combination of a global slowdown and the trough of a 13-quarter long business cycle.
GLOBAL SLOWDOWN TO BLAME FOR FALL IN GDP GROWTH
The survey says that slowdown in the Indian economy must be seen in the context of global growth falling to 2.9%, the lowest since 2008-09. “Amidst a weak environment for global manufacturing, trade and demand, the Indian economy slowed down, with GDP growth moderating to 4.8% in H1 of 2019-20, lower than 6.2% in H2 of 2018-19”, it says. That H2 number will probably have to be reduced further after the latest GDP data release. Interestingly, the IMF sees the causality in the other direction. “We’ve had a significant downward revision for India, over a 100 basis point for each of these years. It’s probably the most important factor for the overall global downgrade of 0.1%,” Gita Gopinath, IMF’s chief economist told Bloomberg Quint on the sidelines of the World Economic Forum in Davos.
"Typically if you look at the peaks and troughs and co-relate it... it seems like we have hit the trough, therefore there should be uptick in growth.”
KV SUBRAMANIAN, chief economic adviser
"The state of the economy under MODI-1 was actually worse than what we believed so far. Will the articulate and voluble Ministers please speak on the state of the economy..."
P CHIDAMBARAM, Congress MP and former finance minister
NEWDELHI:The Union Budget is a virtual smorgasbord of numbers, but here’s what some top economists will be looking at (and why) when the finance minister presents the finance bill on Saturday. The ones most pick: disinvestment target; tax revenue; government expenditure (especially capital expenditure); and the primary deficit.
Maitreesh Ghatak, Professor, London School of Economics
Tax collection: First, I would look out for the actual numbers on tax collection, especially given the reports of shortfalls, as that is an important measure of state capacity to do anything.
Government expenditure:
From this, If I have to mention one number, that would be if the allocation for welfare schemes has gone up or at least maintained, as slowing consumption demand from the masses is a leading cause behind the economy slowdown. Besides that, these schemes affect the poorer and more vulnerable sections. Capital expenditure on infrastructure would be another number I would watch out for, because of its dual role in enhancing demand and boosting productive capacity.
Disinvestment:
To get a sense of the longer-term policy direction of the government, I would watch out for the number on disinvestments to see if the government is serious about reforms. I would be equally curious to see whether and how much import tariffs go up, or whether the pattern of changes in tax rates favour the well-off.
Vidhya Soundararajan,
Assistant Professor (Economics), Indian Institute of Management, Bangalore
Government schemes:
To improve spending, a revision of income tax slabs is expected. But with a large majority engaged in casual work, a boost to infrastructure, employment, and welfare program allocation is imperative to increase cash in hand. Specific details of the preannounced National Infrastructure Pipeline and other schemes are to be watched out for. The government should not miss rural inclusion in these projects.
Tax measures: Disinvestment targets remain unmet, and tax revenues have been slowing; these are exacerbated by, and will in turn hurt, the slowing economy. Will the rumoured increase in Goods and Services Tax rates solve problems or hurt even further? Should we instead focus on improving tax compliance, and sharing the compensation cess with states? Steps taken here would be crucial.
MSME boost: MSMEs contribute to 29% of the GDP. Encouraging this sector can raise entrepreneurial spirits, foster employment growth, and spur rural/semi-urban economic activity during this downturn. While the MSME ministry has requested a 70% jump in the sector’s funding in FY20-21, government action is awaited.
Chief
Pranjul Bhandari,
India Economist, HSBC.
Disinvestment target:
The government will have to strike a balance between being ambitious and being realistic. We expect a doubling in disinvestment revenues from an expected Rs 65,000 crore in FY20 to Rs 1.3 lakh crore in FY21. This, in our view, will be critical for any fiscal consolidation in FY21.
Tax buoyancy. This is basically the ratio between growth in taxes and growth in GDP. The tax buoyancy is likely to have fallen to 0.5 in FY20. But efforts to improve the GST compliance regime could push it back up to 1-1.2 in FY21.
Import tariffs:
The third think to look at is the number of items for which the import tariffs are raised. The government has been raising import tariffs on a number of items in each of the last three budgets. Our research shows that an import tariff can act like an export tax. It can come in the way of India integrating into global supply chains.
Pranab Sen, Economist, Former Chief Statistician of India
Fiscal Deficit:
This is a measure of the government’s intention to boost the economy. If it is less than 4%, then we should worry since it means continuing contraction on government’s part. Between 4 and 5%, it is at best status quo. Only if it is above 5% do we have any hope of a genuine turnaround.
Tax revenue: This has been a particularly weak area in the last two budgets, where there has been gross overestimation. Realistically, this year’s BE (budget estimate) should not be more than last year’s BE. If it is much higher, then again we should worry since it will mean continuing “tax terrorism”.
Disinvestment: There have been many statements of intent but little to show. Public-sector undertakings (PSUs) have been hollowed out by various means to show performance on this. There is little left to squeeze out. This time, therefore, a disinvestment target could mean what it says.
Niranjan Rajadhyaksha,
Research Director and Senior Fellow, IDFC Institute
Primary deficit:
A lot of public attention will quite rightly be focused on the fiscal deficit. However, the primary deficit numbers give us a good sense of the fiscal direction an economy is taking. It is especially useful to identify turning points. The primary deficit excludes interest payments of the government, which is the cost of past borrowing. It is hence a good indicator of the current state of public finances. The primary deficit has come down from 2.8% of the GDP in 2011-12 to 0.2% of the GDP in 2018-19. It is expected to shoot up this year.
The size of the increase will determine a fiscal turning point. Also, a large primary deficit is a worry when nominal economic growth is lower than the rate of government borrowing. India is close to that situation right now. That has serious implications for the sustainability of public debt.
Tax buoyancy: The July 2019 budget unrealistically assumed a tax buoyancy of 1.6, or that the government would collect Rs 1.60 of extra taxes for every Re 1 of extra GDP. That number is among several unrealistic assumptions in the previous budget. The tax collections – both direct and indirect – through the current fiscal year suggest that the actual tax buoyancy will be far lower. In fact, tax buoyancy has been less than 1 in six out of the previous 10 years.
In other words, tax collections have lagged economic growth. This has two implications. First, it tells whether tax reforms are delivering in terms of higher revenues. Two, it gives us an idea whether there will be enough fiscal capacity to meet the various security, public goods, and welfare commitments of the government. For context, the highest tax buoyancy in recent times was 2.4 in the fiscal year ended March 2003.
Spending trends:
The broad consensus among economists right now is that the government has to increase spending to support the economy till private sector demand revives. The question is, how? There are two choices – welfare spending or capital spending. The advantage of capital spending is that it provides more bang for the buck in the long term, or what economists call a higher multiplier. The disadvantage is that it takes very long for new projects to get off the ground in India.