Growth pangs to linger; exports to boost GDP growth: Economic Survey

GDP growth pegged at 6.75-7.5 per cent in 2017-18

Underlining the uncertainty in the economy, the Economic Survey 2016-17 on Tuesday projected gross domestic product (GDP) to grow at 6.75-7.5 per cent in FY18. The Central Statistics Office (CSO) had earlier projected 7.1 per cent in FY17.
 
]With private investments unlikely to recover significantly from the current levels, the Survey expects exports to provide the much-needed fillip to the growth. The outlook for consumption, which accounts for a lion’s share of GDP, is uncertain, it noted.

 Of the four principal drivers of growth, exports could well turn out to be the driver of growth in FY18. After months of muted performance, India’s exports seemed to be recovering off late largely due to an uptick in global economic activity. This, the survey believes, could continue with the growth in the US likely to pick up on account of a fiscal stimulus.  If global growth edges up to 3.4 per cent in 2017, as forecast by the International Monetary Fund, the Survey expects exports to contribute to higher growth by one percentage point. This recovery could also have broader spillover effects on investment.

 

On consumption, though, the outlook is less certain. Higher oil prices could drag down discretionary spending by households.  But consumption could get a fillip on account of cheaper borrowing costs — borrowing costs are expected to be 75 to 100 basis points lower in 2017, as compared to 2016. Add to that the catch-up in demand after the demonetisation-induced reduction in the last two quarters of FY17 and spending on housing and consumer durables and semi-durables could rise, the Survey notes.
 
Private investment continues to remain a source of concern. There has been no clear progress on tackling the twin balance sheet problem, the Survey pointed . With bank and corporate balance sheets continuing to be under stress, private investment is unlikely to recover significantly from the levels of FY17.

 
Higher public investments could offset sluggish private investments. But the extent to which this happens depends on the fiscal stance of the government. The government was expected to bring the fiscal deficit down to 3 per cent of GDP in FY18. But after demonetisation, some economists have suggested the government postpone fiscal consolidation and provide a fiscal stimulus to the economy. This dilemma reflects in the Economic Survey. “The stance of fiscal policy next year has to balance the short-term requirements of an economy recovering from demonetisation against the medium-term necessity of adhering to fiscal discipline—and the need to be seen as doing so,” it said.   The government’s fiscal picture gets complicated with the lack of clarity on its revenues.

 
 First, the windfall on account of lower oil prices is likely to disappear the coming year, which will impact tax collections.  The Survey estimates excise-related taxes will decline by about 0.1 percentage point of GDP. Second, roll-out of the goods and services tax will complicate revenue projections of the Centre.  But on the other hand, the government is expected to receive a fiscal windfall from the high-denomination notes that are not returned to the Reserve Bank of India (RBI), as well as from higher tax collections as a result of increased disclosure under the Pradhan Mantra Garib Kalyan Yojana. This could create fiscal space for a stimulus.

 
While the Survey has forecast growth at 6.75-7.5 per cent, it highlights the downside risks the forecast has from three sources.  First, it is likely the effects of demonetisation could linger into the next year. This, according to the Survey, could affect supplies of certain agricultural products, especially milk (where procurement has been low), sugar (where cane availability and drought in some southern states will restrict production), and potatoes and onions (where sowings have been low). This will have an impact on inflation, reducing space for RBI to lower rates.
 
Second, higher oil prices could also reduce consumption, lower corporate margins and leave less room for investment. It will also reduce space for monetary easing.  Third, trade tensions could emerge, which could negatively impact global growth and trigger capital flight from emerging markets.