Economy in pink of health: Economic Survey

The Economic Survey for 2017-18, released by the finance ministry on Monday, sees green shoots of economic revival appearing as benefits from structural reforms like demonetization, goods and services tax (GST), Insolvency and Bankruptcy Code (IBC) and others take root.

It said robust exports propelled by rising global economic growth could also push India's GDP ahead of China.

The survey, however, warns of headwinds from firm global crude prices and "sudden stall" of capital inflows in the market due to elevated stock prices. It said higher crude prices could drag down consumption as they set off inflationary impact.

The survey, authored by a team of economists headed by Arvind Subramanian, chief economic advisor (CEA) in the finance ministry, forecasts the current fiscal to end with a GDP growth of 6.75%, the lower end of the growth range of 6.75-7.5% projected by it in August last year. India's GDP grew at 7.1% in FY17.

The Central Statistical Office (CSO), earlier this month, has given a more conservative GDP growth estimate of 6.5%, pulled down mainly due to sluggish growth in manufacturing and farm sectors and adverse impacts of GST.

Subramanian does expect the CSO to "contest" the finance ministry's outlook; "growth projections for FY18 at 6.75% is higher than the CSO's estimate, in large part, because the CSO has itself acknowledged that they weren't able to fully take account of recent developments. I don't think they would contest this projection in any way".

For the next fiscal, the survey has pegged the real GDP growth at 7-7.5% and gross value added (GVA) growth at 6.1%. The nominal GDP growth is expected to come at 10.5%.

"A series of major reforms undertaken over the past year will allow real GDP growth to reach 6.75% this fiscal and will rise to 7.0% to 7.5% in 2018-19, thereby re-instating India as the world's fastest growing major economy," the economic study stated.

In the current fiscal, GDP growth had plunged to 5.7% in the first quarter and then slightly recovered in the second quarter to 6.3%.

D K Srivastava, chief policy advisor, EY India, says the Eco Survey's outlook for the current fiscal is based on a strong recovery in the third quarter.

"The survey is signalling a strong recovery from the third quarter of FY18 and building up to more than 7% growth in FY19. Possibly closer to 7.5%. This is in line with IMF and World Bank projections. Clearly, a robust recovery is being signalled by the survey," he said.

The survey believes that if all the upside potentials for next fiscal plays out, then GDP growth could even scale to 8%.

"If macro-economic stability is kept under control, the ongoing reforms are stabilised, and the world economy remains buoyant as today, growth could start recovering towards its medium term economic potential of at least 8%," said the survey.

And even though the survey does not specify the extent of slippage in the fiscal deficit target of 3.2% of the GDP for this fiscal, it very clearly says that it did not "rule out" a pause in fiscal consolidation.

"Reflecting largely fiscal developments at the Centre, a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out," says the Survey.

EY's Srivastava expects the government to return on fiscal consolidation track next fiscal after deviating from it this year.

The stubbornly absent or low private investment over the past few years is also "seemed poised" for a rebound.

At the same time, agriculture, industry and services sectors are expected to grow at 2.1%, 4.4%, and 8.3% respectively this year. Also, after growing negatively for some years, exports moved into positive zone in FY17 and has picked up steam in FY18.

"However, due to higher than expected increase in imports, net exports of goods and services are slated to decline in 2017-18," predicted the survey. It also expects savings and investment as a ratio of GDP to slip this year despite "robust economic growth".

Subramanian cautioned that if the crude oil prices stayed the current level, then there would be challenges in the coming fiscal.

"If prices remain at the current levels, then I think there will be challenges. Rule of thumb (is that) with every $10 (per barrel) rise in price of oil, GDP growth comes down by 0.2%-0.3%; the current account deficit (CAD) will deteriorate by about 0.4 percentage point of GDP (or) $10 billion. Inflation will also be higher by 0.2%-0.3%. We need to watch oil prices very carefully. That's a risk," warned the government's chief economist.

He also warned of a sharp correction in elevated stock prices, which may lead to "sudden stall in capital inflows".

"Having seen emerging market experiences around the world over the last 20-25 years, I should always be watchful when macro risk mounts (due to) sudden stalls in capital flow because then macro policy will have to be tighter. Then, you get the classic dilemma between stability and growth and you have these consequences," said Subramanian.

According to him, oil price in FY18 rose 16% from a year before. This adversely affected consumption. The International Monetary Fund (IMF) has forecast another 12% rise in global crude prices next fiscal.

Red flagging emerging macroeconomic concerns, the survey stated that "policy vigilance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply, provoking a "sudden stall" in capital flows".

It consequently set out the agenda for the next year; "stabilising the GST, completing the TBS actions, privatising Air India, and staving off threats to macro-economic stability. The TBS actions, noteworthy for cracking the long-standing "exit" problem, need complementary reforms to shrink unviable banks and allow greater private sector participation".

Over the medium term, it articulated three areas of policy focus for the government.

"Employment: finding good jobs for the young and burgeoning workforce, especially for women. Education: creating an educated and healthy labour force. Agriculture: raising farm productivity while strengthening agricultural resilience. Above all, India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines—private investment and exports," says survey said.

An interesting aspect on the GST, brought out by the survey, was that there has been an increase of 50% increase in the number of indirect taxpayers. It also pointed to an addition of about 18 lakh in individual income tax filers since November 2016 (after demonetization).

Anis Chakravarty, lead economist and partner, Deloitte India, expects this to improve the government's fiscal position.

"There seems to be considerable improvement in store for direct and indirect tax collections that can in turn lead to better fiscal numbers," he said.

THE SUNNY SIDE

• The survey believes that if all the upside potentials for next fiscal play out, then growth could even scale to 8%
   
• Robust exports propelled by rising global economic growth could push GDP ahead of China

SURVEY HIGHLIGHTS

GROWTH

• 2018/19 Growth seen at 7% to 7.5% y/y
   
• 2017/18 GDP growth seen at 6.75% y/y
   
• 2017/18 industry growth seen at 4.4%
   
• 2017/18 farm sector growth seen at 2.1%
   
• Economic management will be challenging in the coming year
   
• Biggest source of upside to growth to be from exports
   
• Cyclical conditions may lead to lower tax and non-tax revenues in 2017/18
   
• Private investment poised to rebound

FISCAL DEFICIT

• Target for fiscal consolidation specially in a pre-election year can carry a high risk of credibility
   
• Marked efforts will be required to meet budgeted revenue and fiscal deficit targets for full year
   
• Current account deficit for 2017/18 expected to average 1.5-2% of GDP
   
• Pause in general govt fiscal consolidation cannot be ruled out in 2017/18
   
• Suggests modest (fiscal) consolidation that signals a return to the path of gradual deficit