E-Paper
India to grow 6-6.5% next year: Economic Survey
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).
The Indian economy, which has been caught in a six-quarter 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, Switzerland.
Also, even at 5.7% in 2019-20, GDP growth will have declined three years in a row – from 7% in 2017-18 to 6.1% in 2018-19, and then lower. That suggests a deeper problem. In 2017-18, India’s GDP growth actually went down to 7% from 8.2% in 2016-17 even though global GDP growth increased by 40 basis points to 3.8% in 2016.
There’s also the issue of global growth being hit by the Coronavirus.
As Ranen Banerjee, leader-Economic Advisory Services, PwC India, put it: “Attaining the projected growth rate of 6-6.5% will be challenging. The demand cycle is yet to pick up in India. Global growth including India is likely to be significantly impacted by the Coronavirus factor taking cues from history of impacts from the SARS outbreak. We can possibly infer a significantly higher government spending in the next fiscal from these projected growth numbers and will have to await the Budget announcements tomorrow for the same.” However, chief economic adviser Krishnamurthy V Subramanian said, “Coronavirus will have a marginal impact.”
4.5% growth in September 2019 was trough of a 13 quarter business cycle
The survey argues that the GDP growth of 4.5% in the September quarter (this number will have to be revised upward in view of the latest GDP data) represents a trough and it “appears that the length of the business cycle is about 13 quarters”.
While the survey has only looked at data from June 2012, including the earlier period in the analysis makes the trend look different from what is being claimed. In fact, the only period that saw a six quarter continuous deceleration in GDP growth (from June 1997, the earliest period for which data is available in the Centre for Monitoring Indian Economy database), is between March 2011 and June 2012, when the economy was dealing with soaring inflation, falling growth and a sharp deterioration on the external front.
Also, last year’s survey actually predicted a recovery in GDP growth from 6.8% to 7% in 2019-2020, which is against the current argument of a cyclical downturn plaguing the economy.
A 2007 paper co-authored by Gita Gopinath has argued that “shocks to trend growth—rather than transitory fluctuations around a stable trend — are the primary source of fluctuations in emerging markets”, which questions the premise of cyclical downturn being used to explain the current slowdown.
Demand revival is already underway in the economy
The survey cites 10 indicators to argue that the second half of the fiscal year will witness an uptick over the first half in terms of growth. They are NIFTY India consumption index, rise in BSE Sensex, growth in FDI in this year, rise in core inflation and wholesale inflation, improvement in terms of trade – ratio of prices received to prices paid – for farmers, rebound in Index of Industrial Production in November, improvement in Purchasing Managers’ Index (PMI), growth in merchandise exports, growth in foreign exchange reserves and growth in GST collections in November and December. Hindustan Times has previously highlighted some of these as emerging green shoots. The index of eight core sector industries grew at 1.3% in December 2019 after contracting for four consecutive months. These green shoots notwithstanding, the sharp rise in food inflation might put a squeeze on household budgets, adversely affecting demand in the process. For example, once transport and communication – telecom companies hiked mobile tariffs in December – is taken out of the core inflation basket, it actually shows a decline in December. The survey argues that “rise in CPI-core and WPI inflation in December 2019 suggests the building of demand pressure”. “The data scan by the economic survey suggests that the economic slowdown may be tapering with green shoots visible in a few quarters of the economy,” said Rumki Majumdar, economist, Deloitte India.
Strong reversion of headline to core inflation
The survey argues that there has been a change in inflation dynamics in India and “there is evidence for a strong reversion of headline inflation to core inflation” whereas “transmission of inflation from non-core components to core components is minimal”.
Core-inflation is the non-food non-fuel component of Consumer Price Index. The survey’s findings seem to suggest that food and fuel inflation do not matter in determination of headline inflation numbers. An RBI study released in May 2019 had warned against such conclusions. “Cross-country evidence suggests that there is a positive correlation of forecast errors with the share of food in the CPI basket,” it had said. Food items have a share of almost 40% in the CPI basket in the India. The recent period has also been a phase of benign crude oil prices. A significant oil shock still has the probability to lead to an inflationary spike.
Formal sector employment has increased
While talking about trends in employment, the survey argues that formal sector jobs have increased in India. “The share of regular wage/salaried employees has increased by 5 percentage points from 18% in 2011-12 to 23% in 2017- 18 as per usual status,” it says.
“The government should worry not about just formal sector employment but the overall employment scenario. PLFS shows that total number of jobs have gone down by 16 million between 2011-12 and 2017-18,” said Himanshu, associate professor of economics at Jawaharlal Nehru University.
Interestingly, the survey’s theme, according to Subramanian, is “wealth creation”, which, he explained, was also the reason for the lavender colour scheme of the cover of the document.
“On the 15th of August the Hon’able Prime Minister spoke about wealth creation and mentioned that wealth creators needs to be respected because wealth cannot be distributed unless it is created... Inspired by these ideas the theme of this year’s Economic Survey is wealth creation. The cover of the Economic Survey, which is lavender captures the one hundred rupee’s new note, which is in this colour and combines the old with the new,” he said.
“The Economic Survey rightly shines the spotlight on some cardinal themes that are vital for India’s aspirations to become a $ 5 trillion economy by 2025: strengthening trust in the economy, better enforcement of contracts, enabling and empowering markets, promotion of pro-business policies, and measures to enhance farmer’s income. The survey has suggested another round of policy interventions for making it easier to open new businesses, register property, pay taxes and to enforce contracts,” said Arun Kumar, chairman and CEO, KMPG India. “It also underscores the need for measures to strengthen trust across the economy as well as foster ethical wealth creation.”
