A worrying analysis

Govt should heed the Survey's advice on growth

The second volume of the Economic Survey for 2016-17 was released on Friday, and both the data and the analysis contained therein were disquieting. It is more than half a year since the Survey’s first volume was released just before the Union Budget. The presentation of the Budget had been advanced by a month, which meant that the section of the Survey that dealt with the data for the past financial year could not be produced at the same time; it has now been published, but, more importantly, it also carries an analysis of the economy since the Budget. As it is, the first volume of the Survey was hardly an over-optimistic document — it was more a breath of realism than anything else. But the second volume is particularly blunt about the travails of the Indian economy and lays out an even more urgent case for a traditional reform programme.

In February, the Economic Survey had forecast growth in gross domestic product, or GDP, of between 6.75 per cent and 7.50 per cent in 2017-18. The second volume of the Survey has not changed that range but acknowledged that the downside risks have built up since then. It enumerates several of these risks, including falling agricultural revenue, state government finances, stress in the power and telecommunications sectors, and the costs of transitioning to the goods and services tax, or GST, regime. This concern sits alongside longer-term optimism about the economy that owes a great deal to the passage of the GST itself, though the Survey acknowledges how incomplete the current GST is. The other source of optimism is its strong belief that India has moved permanently to a lower-inflation paradigm. The Survey attempts to explain this by arguing that oil prices have now become permanently lower, since 2014; and that the agricultural sector has been transformed through reform such that agricultural prices are less volatile and more predictable. Given this inflation situation, the Survey argues, current real interest rates are too high — around 4.7 per cent. While the Survey might well have a point that rates are too high — especially if the economy is well below potential output, as appears to be the case — it does not effectively prove the argument that agriculture has been reformed sufficiently. There is no persuasive evidence that high inflation could not return in mere weeks if the conditions are right.

But the most worrying aspect of the Survey is that it provides, other than the GST, no real grounds for medium- or long-term optimism. On the contrary, it does provide some worrying analysis of past high growth. It examines India’s recent growth spurt, which was accompanied by slow credit growth, stagnant or declining exports, and weak investment, and discovered that this was a combination of circumstances that was exceptional. What is exceptional may not be sustainable — and in this case, the Survey points out, growth is being driven entirely by government spending and consumption, which is definitely not a sustainable source of growth. The Survey concludes this warrants action on “more normal drivers of growth”. The government should take that advice seriously.