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