In­dia’s fis­cal out­look clouded, says mid-year eco­nomic sur­vey

Muscat Daily - - BUSINESS -

Mum­bai, In­dia - In­dia warned that fis­cal slip­pages could be a drag on Asia’s third-largest econ­omy in the year to March 2018, but pledged to meet its bud­get deficit tar­gets as it sought to re­as­sure in­vestors and global rat­ing com­pa­nies.

The mid-year sur­vey of the econ­omy re­leased by Prime Min­is­ter Naren­dra Modi’s chief eco­nomic ad­vi­sor, Arvind Subra­ma­nian, also called for in­ter­est rates to be low­ered even fur­ther as In­dia strug­gles with sub­dued pri­vate sec­tor in­vest­ment and a bank­ing sec­tor grap­pling with ris­ing non-per­form­ing as­sets.

It cau­tioned that ‘anx­i­ety reigns be­cause a se­ries of de­fla­tion­ary im­pulses are weigh­ing on an econ­omy yet to gather its full mo­men­tum’. Th­ese in­clude stressed rev­enues from the agri­cul­tural sec­tor, farm loan waivers and de­clin­ing prof­itabil­ity in the power and telecom­mu­ni­ca­tion sec­tors.

But it also pointed to op­ti­mism gen­er­ated by struc­tural re­forms such as the in­tro­duc­tion of the goods and ser­vices tax and the de­ci­sion to pri­va­tise Air In­dia. There is ‘grow­ing con­fi­dence that macro-eco­nomic sta­bil­ity has be­come en­trenched’, the sur­vey said.

The cen­tral bank cut rates ear­lier this month to its low­est in seven years to boost the econ­omy amid record low in­fla­tion. On Thurs­day, the cen­tral bank said it was pay­ing a div­i­dend of US$4.6bn to the govern­ment - its low­est in five years - putting New Delhi un­der pres­sure to achieve its bud­get tar­gets through higher as­set sales or cuts in sub­si­dies.

In­dia’s bud­get short­fall is fore­cast to be 3.2 per cent of gross do­mes­tic prod­uct (GDP) in the year to March 2018. While that would be smaller than the pre­vi­ous year’s 3.5 per cent, it’s wider than the tar­get of three per cent. The govern­ment in­tends to hit that tar­get next year, the eco­nomic sur­vey said.

The fed­eral govern­ment has slowly brought the gap down from five per cent of GDP a few years ago. But the deficits are ac­tu­ally widen­ing at the state level - leav­ing In­dia’s fi­nan­cial po­si­tion essen­tially un­changed from 2012, be­fore Modi took power.

The prob­lem is likely to get worse as pop­ulist farm loan waivers and other spend­ing sprees pick up ahead of the gen­eral elec­tion in 2019.

The US$2tn econ­omy is still re­cov­er­ing from Modi’s un­prece­dented cash ban im­posed late last year. And while the in­tro­duc­tion of the goods and ser­vices tax in early July went off smoothly, there are in­di­ca­tions that In­dia’s vast shadow econ­omy - which makes up for an es­ti­mated half of the country’s GDP - has been hurt by both the cash ban as well as the in­tro­duc­tion of the sales tax.

Add to that un­der­ly­ing slack at fac­to­ries, ris­ing job losses and ane­mic loan growth could slow ex­pan­sion be­fore Modi faces re-elec­tion in 2019. His govern­ment has lim­ited room to in­crease spend­ing be­cause it runs a bloated bud­get deficit, and room for mon­e­tary eas­ing may close when the Fed­eral Re­serve starts re­duc­ing its bal­ance sheet later this year.

Arvind Subra­ma­nian

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