The government’s brave and optimistic posturing on the economy met with reality on Friday, with its mid-term economic review revising downward growth projection of both real and nominal gross domestic product (GDP) to 7-7.5% and 8.25%, respectively for the current fiscal.
The earlier growth forecast was 8.1-8.5%.
Arvind Subramanian, chief economic advisor (CEA) to the finance ministry, said the national income growth rates have been pinned down by weak private sector investment, shrinking exports and deficient monsoon even as lower oil prices and interest rates and public investment boosted consumption.
“For an economy that’s being powered just by private consumption and public investment and doing well, the challenge is to revive all engines of growth, going forward,” he told a press conference.
However, most economists felt that with the outlook for nominal GDP rate brought down, the challenge would now be meeting in meeting the fiscal deficit targets, which has been set at 3.9% of the GDP for the current fiscal and 3.5% of the GDP in the next.
D K Srivastava, chief policy advisor, EY, said generally the forecast for nominal GDP is revised when it is felt that tax base is eroding.
According to him, as the tax base is ad valorem, lowering the nominal GDP rate forecast would have an adverse impact on government revenues and could make it difficult for it to meet the fiscal deficit target.
“This year, because they (government) have increased some of the tax rates in the initial part of the year, they had some benefit from it. Those would, however, wear out towards the end of the year. They (government) will find that indirect taxes starting to fall below the target which was fixed on the basis of (earlier) nominal GDP growth,” he said.
Interestingly, early direct taxes collections have revealed considerable shortfall. This, Srivastava said, could pose a challenge on the revenue side for the government.
“They can try and meet the fiscal deficit target via further expenditure cuts and other such measure,” he said.
Srivastava argued that when the denominator – nominal GDP – goes down then the numerator (fiscal deficit) would also have to be adjusted accordingly.
“The fiscal deficit number is based on nominal GDP growth rate and so it will have to be adjusted down and debt (stock of government debt) to GDP ratio would increase at a much faster pace than earlier,” he said.
The EY economist said lower guidance for GDP growth rate also implied that the economy was not recovering as fast as it was being projected.
“They (government) have begun to realise that just by making optimistic noises, it is not going to become optimistic,” he said. He pointed to global factors for the recovery being stalled.
“Without export demand, our domestic demand is not enough to kick the economy up. This is something that we have been saying for sometime. The government was far more optimistic and now they have started to become more realistic,” he said.
Even Subramanian said; “(Economic) outlook going forward is a bit challenging and we have to be realistic about this”.
Richa Gupta, senior director, Deloitte India, said there would have to be back-ended growth in the GDP to achieve the 7-7.5% growth rate for the current fiscal.
“The first half has seen the economy achieve growth of 7.2% and we would expect a slightly higher rate of growth for the second half, which in turn would imply a full year estimate of around 7.4%,” she said in statement issued by Deloitte.
According to her, the government’s reiteration that it would stick to its budget deficit target of 3.9% would espouse confidence in investors that it was serious about controlling its expenditure.
“We expect the increase in indirect tax collections and lower subsidies on account of fuels to help the government achieve its year end goals even as disinvestment is likely to fall short,” said Gupta.
While the Deloitte economist expected the growth inch up further next year, she cautioned on further downturn in global demand conditions.