With scarcity of rainfall and slowdown in exports, the Government on Friday scaled down its economic growth forecast for 2015-16 to 7-7.5 per cent from 8.1-8.5 per cent, hoping that retail inflation is likely to be within the central bank’s target of about 6 per cent. Besides, the Government also assured that budget deficit target would be met as higher tax revenues offset a shortfall in PSU stake sale.
“Given the challenges, we estimate that real Gross Domestic Product (GDP) for the year as a whole will lie in the 7-7.5 per cent range,” said the Mid-Year Economic Analysis, which was tabled in Parliament on Friday, adding that retail inflation is likely to be within the central bank’s target of about 6 per cent.
The report said the decline in nominal GDP growth would pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP - an eight-year low - for the current fiscal year. “The fiscal outlook for 2016-17 looks challenging too and the Government will need to reassess its commitment to cut the deficit further by 0.4 per cent of GDP in the financial year that begins in April,” the survey cautioned.
The Government, in its Economic Survey in February, had also projected a growth rate of 8.1-8.5 per cent for 2015-16, but has now lowered it to 7-7.5 per cent, mainly on account of deficit rainfall and slowdown in exports because of global factors.
As per the analysis, the Finance Ministry said that it would be able to stick to fiscal deficit target of 3.9 per cent for the current year, but the target of bringing it down to 3.5 per cent in the next will face pressure from higher outgo on central staff wages due to implementation of the 7th Pay Commission and Defence pensions.
However, meeting the target of the Seventh Pay Commission recommendations is obviously a Herculean task for the Government. If implemented, it will result in an outgo of Rs1.02 lakh crore in 2016-17, of which the central Government accounts for two-third and likely less corporate tax collection. “The proposed wage hike for Government workers may impact plan for next fiscal,” the report added.
However, Chief Economic Advisor Arvind Subramanian told reporters, “The economy is recovering, but it is hard to be very definitive about the strength and breadth of the recovery for two reasons -- the economy is sending a mixed signal and second, there is some uncertainty on how to interpret GDP data that have come.”
The data uncertainty, the analysis said, is in fact reflected in the mixed, sometimes puzzling signals emanating from the economy. Reacting to the survey, Minister of State for Finance Jayant Sinha, however, added, “The analysis indicates that fiscal and economic performance the Government has been able to demonstrate is excellent. Public investment and private consumption is driving economic growth. We in India are doing very well though there are some areas of economy where we can do much better.”
Terming the tax collections in 2015-16 as ‘buoyant’, the analysis said, “The performance in buoyancy is likely reflected in improved tax administration, especially in relation to indirect taxes. Indirect taxes have fared better than direct taxes, probably because corporate profits have not been buoyant, reflecting a slowing nominal GDP.”
For 2016-17, the analysis said as long as oil prices do not decline further and remain around $50 per barrel, the additional boost to consumption that the economy received this year - of about 1-1.5 percentage point - is likely to recede. “Against this, if the monsoon behaves better next year, there could be some additional impetus to rural consumption. Since corporate balance sheets are only expected to recover slowly, private investment will not be significantly greater than in FY2016,” the Mid-Year Survey said.
Besides, slowing demand overseas has hit growth as exports have been falling for the past 12 months. The exports account for about a fifth of India’s $2 trillion economy. “Declining exports seem to be predominantly determined by a decline in the world demand. Regardless of the causes, the effect has been a drag on growth,” the report said.
The country’s economy had grown 7.2 per cent in first half of the current fiscal and the Reserve Bank of India (RBI) had put the full-year growth at 7.4 per cent. As for the external sector, the analysis said, “The external position appears to be robust. The Current Account Deficit (CAD) has declined and is at comfortable levels, about 1.2 per cent of GDP; foreign-exchange reserves have risen to $352.1 billion as on December 4, 2015 which seems ample.”
As far as world monetary movement is concerned, the US Federal Reserve, meanwhile, has raised interest rates by a quarter percentage, the first in seven years when America tumbled into a deep financial crisis with the collapse of the Wall Street. “India seems well-positioned to absorb any volatility from possible US Federal Reserve actions to normalise monetary policy,” it added.