The Economic Survey says the worst is over and the Indian economy is poised to rebound to grow in the range of 7-7.5% in 2018-19.
It credits this recovery to structural policy fixes, including the decision to put in place a bankruptcy code to deal with the bad debt problem—which it believes had become a binding constraint on economic growth. According to the survey, demonetization of high-value currencies, together with the rollout of the goods and services tax (GST), has led to more people being brought under the tax net and the formal economy is much bigger than what it is estimated at.
Optimistic while the survey is, it makes a case for policy vigilance to deal with downside risks stemming from rising crude oil prices and any setback to the ongoing recovery of the global economy.
“If macro-economic stability is kept under control, the ongoing reforms are stabilized, and the world economy remains buoyant as today, growth could start recovering towards its medium-term economic potential of at least 8%,” the Survey said.
The survey, authored by a team led by chief economic adviser Arvind Subramanian and presented in Parliament by finance minister Arun Jaitley on the first day of the budget session, cites high-frequency data such as exports, factory output and non-food credit growth to up the growth estimate for 2017-18 to 6.75% from 6.5% projected by the Central Statistics Office (CSO).
Given real gross domestic product (GDP) growth of 6% in the first half (April-September) of 2017-18, this implies that growth in the second half (October-March) would rebound to 7.5% in the fourth quarter (January-March).
The statistics department will release the third quarter GDP data on 28 February.
Setting the reform agenda for the next financial year, the Survey makes a case for shrinking unviable public sector banks, privatizing Air India, facilitating easier GST compliance and decisively resolving bankruptcy cases.
Former finance minister and Congress leader P. Chidambaram said the survey was depressing but candid. “The future course of the economy is conditional on many ifs. After listing the unfinished work (and there are many), the survey seems to prepare the grounds for failure by praying that the world economy maintains its growth momentum and oil prices do not persist at current levels. The outlook is therefore uncertain, if not bleak,” he added.
The survey acknowledged the electoral pressures on a government in the final year of its term, and batted for less aggressive fiscal consolidation.
It said setting overly ambitious targets for consolidation—especially in a pre-election year—based on optimistic forecasts that carry a high risk of not being realized will not garner credibility. “Pragmatically steering between these extremes would suggest the following: a modest consolidation that credibly signals a return to the path of gradual but steady fiscal deficit reductions,” it said.
Jaitley has set a fiscal deficit target of 3.2% of GDP for 2017-18 and aims to lower it to 3% in 2018-19. However, less-than-expected revenue collections, especially after implementation of GST, and higher expenditure could generate fiscal pressures.
The survey foresees higher-than-expected inflation in the second half of the current fiscal and projects a nominal GDP growth rate of 10.5% against 9.5% estimated by CSO. This could help the finance minister contain the fiscal slippage in 2017-18.
The survey also cautioned against the eventuality of a sharp correction in elevated stock prices, which could provoke a “sudden stall” in capital flows. Since end-December 2015, the Sensex has surged 46% in rupee terms and 52% in dollar terms.
It, however, acknowledged the decision of the National Democratic Alliance to rationalize subsidies by restricting it to the poor. According to it, there has been considerable progress in providing bank accounts, cooking gas, housing, power and toilets to improve the lives of the poor and marginalized.
“The pace and magnitude of this improvement (in the lives of the poor) will depend upon the extent to which increased physical availability/provision is converted into greater actual use,” the survey observed.