India is poised to become the fastest growing economy in the world in 2018-19 with a Gross Domestic Product (GDP) growth rate predicted to be around 7.5 per cent in 2018-19, up from 6.75 per cent in the current year, according to the Economic Survey presented in Parliament by Finance Minister Arun Jaitley on Monday, two days before the BJP-led Narendra Modi Government’s fifth and final full-year Budget ahead of 2019 general election.
With world economy also picking up along with the domestic economy, India is back to its higher trajectory growth rate mitigating the negative impact caused by demonitisation and Goods and Services Tax (GST). The implementation of GST has given a new perspective to the Indian economy with large increase in the number of indirect taxpayers, followed by a huge number in voluntary registrations, especially by small business houses. The Survey sees the economy expanding by 7-7.5 per cent or it could touch even 8 per cent in 2018-19.
The Survey has also flagged challenges such as a pause in fiscal consolidation, rising oil prices, and a major impact of climate change on farmers’ income. The last one could adversely impact inflation scenario and might bring out a sharp correction in the elevated stock prices.
As far as 2018-19 outlook is concerned, the Survey has suggested some key agenda such as support to agriculture sector, finalising bad loan resolution and recapitalisation of banks, privatisation of Air India, and head-off macro economic pressures by boosting exports and increasing foreign direct investment (FDI), etc.
Taking note of the impact of GST on India’s economy, Chief Economic Adviser Arvind Subramanian said, “GST has given a new perceptive of the Indian economy and new data has emerged. There has been a 50 per cent increase in the number of indirect taxpayers. There has also been a large increase in voluntary registrations, especially by small enterprises that buy from large enterprises wanting to avail themselves of input tax credits.”
The Survey also stated that fears of major producing States that the shift to the new system would undermine their tax collections have been allayed as the distribution of the GST base among the States got closely linked to the size of their economies.
Soon after the release of the Survey, India Inc gave thumbs up to the efforts made by the Government, pitching for focus on rapidly improving human capital and agricultural productivity to sustain the economic growth trajectory. While stock markets cheered and closed at new peaks. Equities resumed their record-setting spree after an upbeat growth forecast by the Survey. The BSE Sensex spurted 233 points to end a fresh lifetime high of 36,283.25, while the broader Nifty too finished at record 11,130.40.
The Survey said exports as well as private investments are set to rebound in the coming year.
The growth rate is higher than the recent CSO estimate of 6.5 per cent. If the ongoing Government’s reforms are stabilised and the world economy remains buoyant as today, the growth could start recovering towards its medium term economic potential of at least 8 per cent.
“This forecast is subject to upside potential and downside risks. The biggest source of upside potential will be exports. If the relationship between India’s exports and world growth returns to that in the boom phase, and if world growth in 2018 is as projected by the IMF, then that could add another half percentage point to growth,” the Survey said.
As far as country’s economy is concerned, the GDP growth was 7.1 per cent in 2016-17 and 8 per cent in the preceding year. It was 7.5 per cent in 2014-15. The growth in the current fiscal has been marred by the rollout of a nationwide GST and the after-effects of demonetisation.
Briefing the media, Subramanian said that the economy seems to be picking up quite nicely and robustly as temporary impact of demonetisation and GST has been decimated. “The growth would be higher if exports pick up but oil prices and a correction in elevated share prices are downside risks,” he said.
The Survey also said, the average price of the basket of crude India imports rose by around 14 per cent in the current fiscal and is projected to further rise by 10-15 per cent in 2018-19. “GDP may be impacted by 0.2-0.3 per cent, inflation will be higher by 0.2-0.3 per cent and current account deficit widen if oil prices were to rise by $10 per barrel,” Subramanian added.
The survey has also focussed on India’s formal sector, especially formal non-farm payroll, which is substantially greater than what it currently is believed to be. “It became evident that when formality was defined in terms of social security provisions like EPFO/ESIC the formal sector payroll was found to be about 31 per cent of the non-agricultural work force. When formality was defined in terms of being part of the GST net, such formal sector payroll share was found to be 53 per cent,” it said.
However, the survey further pointed out that with world growth likely to witness moderate improvement in 2018, expectation of greater stability in GST, likely recovery in investment levels, and ongoing structural reforms should support higher growth. “On balance, country’s economic performance should witness an improvement in 2018-19. For the next year, it prescribed that stabilising the GST, completing the twin balance sheet actions, privatising Air India, and staving off threats to macro-economic stability,” it said.
“Over the medium term, three areas of policy focus stand out — employment which will find good jobs for the young and burgeoning workforce, especially for women; education that can create an educated and healthy labour force and agriculture which can raise farm productivity while strengthening agricultural resilience,” it said.
looking at investment and export position, the Survey also said that India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines — private investment and exports. However, it warned that economic management will be challenging in the coming year due to overall economic and political background.
For the first time in India’s history, data on the international exports of states has been dwelt in the survey. Such data indicates a strong correlation between export performance and states’ standard of living. States that export internationally and trade with other states were found to be richer. Such correlation is stronger between prosperity and international trade.
India’s exports are unusual in that the largest firms account for a much smaller share of exports than in other comparable countries. “Top one per cent of Indian firms account only for 38 per cent of exports unlike in other countries where they account for substantially greater share (72, 68, 67 and 55 per cent in Brazil, Germany, Mexico and USA respectively). Such tendencies were also found to be true for the top five or ten per cent of the Indian companies,” the Survey said.
It pointed out that tax departments in India have gone in for contesting against in several tax disputes but also with a low success rate which is below 30 per cent. About 66 per cent of pending cases accounted for only 1.8 per cent of value at stake. It further stated that 0.2 per cent of cases accounted for 56 per cent of the value at stake.
“Setting overly ambitious targets for consolidation, especially in a pre-election year based on optimistic forecasts that carry a high risk of not being realised will not garner credibility,” it said. To further make it easier for doing business in India, it called for addressing pendency, delays and backlogs in the appellate and judicial arenas.
Reacting to the survey, economists said it provides a holistic picture of the achievements of the last one year and challenges for the next year. “It shows there are signs of upturn that are visible right now and can potentially strengthen over the next few months and are likely to be aided by exports, said Deloitte India’s lead Economist Anis Chakravarty said.