The Economic Survey runs along expected lines. However, it seems a little more realistic and conservative in its short-term projections than the previous year's document.
Growth
GDP growth is estimated to run at somewhere between 7-7.5%. There has been lots of scepticism expressed about the new method of calculating GDP. According to the new methodology, GDP growth for 2014-15 ran at 7.2% and GDP growth in 2015-16 (current fiscal) is estimated at 7.6%. So the estimate for 2016-17 is more or less flat.
Whatever your reservations about the calculation methodology may be, assuming like-to-like methods of calculation are used, the Survey projects that there will be no growth acceleration. That projection of zero acceleration concurs broadly with estimates made by independent analysts and with estimates made by World Bank, IMF, etc. In a year when global growth is expected to be very slow, even maintaining the current pace of economic activity will make India a positive outlier.
(There is some hyperbole thrown in here. The Survey says India becomes more important to the global economy because China is rebalancing and in slowdown and that India will be the fastest-growing of the world's large economies. The latter statement is true in percentage terms.
It is true that China is in slowdown but the People's Republic will generate growth of about 6.9% of its GDP, assuming you believe the official numbers. Since China's economy is about 5 times as large as India, China will contribute growth equivalent to about 35% of India's GDP.
Where is India's growth going to come from?
Good question. Industrial activity has been slow. Agriculture is in trouble with farmers experiencing drought in many parts of the country. Exports are in trouble. The service sector has been doing alright but sharp acceleration looks unlikely. We'll have to hope that industrial activity improves, and that the weather is less inimical, allowing for a bounce in rural and semi-urban activity.
Deficit Estimates
The overall Fiscal Deficit will be held to within about 3.9%. Fair enough. The big windfall was of course, the falling price of crude and of gas and coal as well. Instead of having to absorb huge losses on that front, the GoI receives net gains. In addition, the government raised indirect and service tax rates in 2015-16.
Government expenditure will rise in 2016-17 since the pay hikes recommended by the Seventh Pay Commission will be implemented. This implies that the GoI has very little room to raise investment expenditure (or spend on other things such as healthcare) if it is going to keep the overall Fiscal Deficit under control. The Survey assumes that the 2016-17 target of holding the fiscal deficit to about 3.5 per cent of GDP can be achieved.
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There are some worries on the deficit front. One is the potential for international crude prices to rise. This fiscal (April-2015-Mar 2016) it was assumed (in the Feb 2015 Budget) that crude would trend at an average of about $70/ barrel. In reality, India' crude imports have come in at close to $45-55/ barrel. Right now, the India crude basket is priced at below $35/ barrel. That has helped a lot. If crude rises again, subsidy calculations might go awry.
Unfortunately, the price of crude affects the trade account, and it also affects subsidies for fertilisers as well. There is some brave talk about reforming and reformatting fertiliser subsidies and the subsidy mechanism. Well, this fiscal will see plenty of critical regional elections, and rural distress is high after two years of drought. I doubt that this government (or any government, for that matter) will have the courage to cut fertiliser subsidy if crude prices do spike.
Another big worry is India's trade account. Exports have taken a hammering, falling every month for the past 14 months. India is evidently uncompetitive in many areas of product exports since it has lost market-share to Bangladesh, Vietnam and The Philippines. Service exports (IT and tourism) are flat or falling as well due to generally low levels of global activity.
Imports have also fallen but not quite so fast. If exports continue falling, the trade deficit may grow. If the trade deficit grows and service exports (meaning IT, tourism, etc) also flattens or falls, the Current Account Deficit would also rise. Right now, the CAD is at a manageable 1.5% of GDP. It could get worrying if it climbed significantly.
Inflation
Inflation appears to be more or less under control and the Survey assumes it will stay that way. At the wholesale level, inflation is negative. It is in the range of 5.5% year on year at the retail or consumer level. The saving grace has of course, been low energy costs. The fastest rising segment of the consumer basket has been food.
If the monsoons are better this year, leading to better food production, and the price of energy fuels does not rise, inflation will stay under control. Neither of these things can be controlled by the GoI but the Survey assumes, reasonably enough, that inflation won't go into top gear. It may be mildly over-optimistic in assuming a range of 4.5-5.5% year-on-year (for retail inflation as measured by the Consumer Price Index ) but the RBI is also gunning for similar targets.
Investments
Overseas investments have been reasonable this fiscal, with FDI rising by 31% (Apr-Nov 2015). However, domestic private investment has been low and bank credit growth was at the lowest level in a decade. The GoI cannot really find the resources to do pump priming, without pushing up the fiscal deficit. We will just have to wait for a revival of private confidence and appetite for investment.
Tax structures & other reforms
The Survey points out the need for a better bankruptcy law. It makes pious noises about more efficient healthcare and higher quality of education. Nobody would disagree about the diagnosis or the desirability of these things.
In practice, getting any law, good, bad or indifferent, through Parliament at this stage might be difficult. Also, the last Budget cut allocations to social sectors like healthcare, women's welfare and education. It's hard to see these intentions being backed by any sort of large allocation hikes in the 2016 Budget.
The Survey also recalls the long stated objective of reducing corporate tax rates while simultaneously reducing exemptions. We'll see if there is followthrough.
There is also a hint that the government might be desperate enough to take radical measures to enable bank recapitalisation, given that public sector banks (PSB) are drowning in bad debt. Again, this is an imperative since many PSBs are on the edge of bankruptcy. Let's see how the Budget proposes to tackle this particular situation.
Net-net, the Survey says growth won't accelerate but with luck it won't slowdown either. Assuming energy prices remain stable at near the current levels, deficit management won't be an issue. Inflation will also be in a reasonable range, given low energy prices and a better agricultural performance.
The mandarins of North Block have not forgotten about the need to rationalise tax structures. They would also like a stronger focus on the social sector. We'll know on Monday if their views are shared by the political establishment.
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Growth
GDP growth is estimated to run at somewhere between 7-7.5%. There has been lots of scepticism expressed about the new method of calculating GDP. According to the new methodology, GDP growth for 2014-15 ran at 7.2% and GDP growth in 2015-16 (current fiscal) is estimated at 7.6%. So the estimate for 2016-17 is more or less flat.
Whatever your reservations about the calculation methodology may be, assuming like-to-like methods of calculation are used, the Survey projects that there will be no growth acceleration. That projection of zero acceleration concurs broadly with estimates made by independent analysts and with estimates made by World Bank, IMF, etc. In a year when global growth is expected to be very slow, even maintaining the current pace of economic activity will make India a positive outlier.
(There is some hyperbole thrown in here. The Survey says India becomes more important to the global economy because China is rebalancing and in slowdown and that India will be the fastest-growing of the world's large economies. The latter statement is true in percentage terms.
It is true that China is in slowdown but the People's Republic will generate growth of about 6.9% of its GDP, assuming you believe the official numbers. Since China's economy is about 5 times as large as India, China will contribute growth equivalent to about 35% of India's GDP.
Where is India's growth going to come from?
Good question. Industrial activity has been slow. Agriculture is in trouble with farmers experiencing drought in many parts of the country. Exports are in trouble. The service sector has been doing alright but sharp acceleration looks unlikely. We'll have to hope that industrial activity improves, and that the weather is less inimical, allowing for a bounce in rural and semi-urban activity.
Deficit Estimates
The overall Fiscal Deficit will be held to within about 3.9%. Fair enough. The big windfall was of course, the falling price of crude and of gas and coal as well. Instead of having to absorb huge losses on that front, the GoI receives net gains. In addition, the government raised indirect and service tax rates in 2015-16.
Government expenditure will rise in 2016-17 since the pay hikes recommended by the Seventh Pay Commission will be implemented. This implies that the GoI has very little room to raise investment expenditure (or spend on other things such as healthcare) if it is going to keep the overall Fiscal Deficit under control. The Survey assumes that the 2016-17 target of holding the fiscal deficit to about 3.5 per cent of GDP can be achieved.
There are some worries on the deficit front. One is the potential for international crude prices to rise. This fiscal (April-2015-Mar 2016) it was assumed (in the Feb 2015 Budget) that crude would trend at an average of about $70/ barrel. In reality, India' crude imports have come in at close to $45-55/ barrel. Right now, the India crude basket is priced at below $35/ barrel. That has helped a lot. If crude rises again, subsidy calculations might go awry.
Unfortunately, the price of crude affects the trade account, and it also affects subsidies for fertilisers as well. There is some brave talk about reforming and reformatting fertiliser subsidies and the subsidy mechanism. Well, this fiscal will see plenty of critical regional elections, and rural distress is high after two years of drought. I doubt that this government (or any government, for that matter) will have the courage to cut fertiliser subsidy if crude prices do spike.
Another big worry is India's trade account. Exports have taken a hammering, falling every month for the past 14 months. India is evidently uncompetitive in many areas of product exports since it has lost market-share to Bangladesh, Vietnam and The Philippines. Service exports (IT and tourism) are flat or falling as well due to generally low levels of global activity.
Imports have also fallen but not quite so fast. If exports continue falling, the trade deficit may grow. If the trade deficit grows and service exports (meaning IT, tourism, etc) also flattens or falls, the Current Account Deficit would also rise. Right now, the CAD is at a manageable 1.5% of GDP. It could get worrying if it climbed significantly.
Inflation
Inflation appears to be more or less under control and the Survey assumes it will stay that way. At the wholesale level, inflation is negative. It is in the range of 5.5% year on year at the retail or consumer level. The saving grace has of course, been low energy costs. The fastest rising segment of the consumer basket has been food.
If the monsoons are better this year, leading to better food production, and the price of energy fuels does not rise, inflation will stay under control. Neither of these things can be controlled by the GoI but the Survey assumes, reasonably enough, that inflation won't go into top gear. It may be mildly over-optimistic in assuming a range of 4.5-5.5% year-on-year (for retail inflation as measured by the Consumer Price Index ) but the RBI is also gunning for similar targets.
Investments
Overseas investments have been reasonable this fiscal, with FDI rising by 31% (Apr-Nov 2015). However, domestic private investment has been low and bank credit growth was at the lowest level in a decade. The GoI cannot really find the resources to do pump priming, without pushing up the fiscal deficit. We will just have to wait for a revival of private confidence and appetite for investment.
Tax structures & other reforms
The Survey points out the need for a better bankruptcy law. It makes pious noises about more efficient healthcare and higher quality of education. Nobody would disagree about the diagnosis or the desirability of these things.
In practice, getting any law, good, bad or indifferent, through Parliament at this stage might be difficult. Also, the last Budget cut allocations to social sectors like healthcare, women's welfare and education. It's hard to see these intentions being backed by any sort of large allocation hikes in the 2016 Budget.
The Survey also recalls the long stated objective of reducing corporate tax rates while simultaneously reducing exemptions. We'll see if there is followthrough.
There is also a hint that the government might be desperate enough to take radical measures to enable bank recapitalisation, given that public sector banks (PSB) are drowning in bad debt. Again, this is an imperative since many PSBs are on the edge of bankruptcy. Let's see how the Budget proposes to tackle this particular situation.
Net-net, the Survey says growth won't accelerate but with luck it won't slowdown either. Assuming energy prices remain stable at near the current levels, deficit management won't be an issue. Inflation will also be in a reasonable range, given low energy prices and a better agricultural performance.
The mandarins of North Block have not forgotten about the need to rationalise tax structures. They would also like a stronger focus on the social sector. We'll know on Monday if their views are shared by the political establishment.
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