Change track to revive growth: Ind-Ra cautions govt

Says generating jobs an uphill task even if growth recovers

India Ratings (Ind-Ra) on Tuesday cautioned the government that its strategy to revive economic growth by focusing on infrastructure may not yield results unless real estate and manufacturing sectors recover.

Revising down economic growth by one percentage point to 6.8 per cent from earlier 7.8 per cent for the current financial year due to demonetisation, the rating agency pegged economic expansion in the next financial year to 7.4 per cent. Ind-Ra, however, said it is an uphill task to create jobs even if growth revives.

Sunil Kumar Sinha, principal economist with Ind-Ra, told reporters that capital expenditure by both the Centre and state governments constitute just 20 per cent of gross capital formation in the country. On the other hand, real estate and manufacturing sectors account for 43.3 per cent of total investments.

As such, reviving economic growth is hinged on recovery of real estate and manufacturing sectors. In fact, revival of real estate sector is essential as it has backward linkages with almost 250 manufacturing industries in the country, he said.

The government efforts to revive real estate through affordable housing and proposed setting up of regulator would take time to give boost to the sector and hence recovery of economic growth will take time, Sinha said.

As such, economic growth is likely to be just 7.4 per cent in the next financial year and that too on the assumption of back-to-back normal monsoon for the second consecutive year, he said. Economic growth forecast of Ind-Ra for 2017-18 is close to the upper end of the 6.75 to 7.5 per cent band estimated in the Economic Survey.

In fact the growth in the next financial sector would come from consumption and not investment, he added.

When asked whether the growth would lead to jobs, he said creation of employment is much more complex issue than reviving economic growth. Even in the manufacturing sector, companies may like to make their units competitive at the domestic level and also at the global level. That would require more automation, that may not lead to job creation.

The jobs lost due to demonetisation in real estate and manufacturing may not come back automatically even if these sectors revive, he said.

"I don't think that remonetisation will offset job losses due to demonetisation," Sinha said.

Though stalled projects have come down, there is still big overhang. All the projects which are cleared have not taken off, Sinha said.

Besides, gross non-performing assets of the banking sector are supposed to touch 9.5 per cent of their advances at the end of the current financial year with public sector banks facing these bad debts at 12.1 per cent, he said.

The Central Statistics Office has pegged India's gross domestic product at 7.1 per cent in 2016-17, but that estimates did not take into account effects of demonetisation. The Office will come out with revised advance estimates by February 28 which will factor in the impact of demonetisation.

The rating agency said that it expects the current account deficit to come in at 1 per cent of the GDP in 2017-18 as against 0.9 per cent in 2016-17.

"This will help the rupee trade at an average 69.18/USD in FY18," it noted.

Observing that while India is likely to face continued headwinds on the exports front due to the play out of Brexit and the anti-globalisation stance of US President Donald Trump, it pointed out that imports are unlikely to pick up so long as the domestic investment cycle does not revive.