In an hour-and-half-long media briefing after tabling of the Economic Survey 2017-18, Chief Economic Advisor Arvind Subramanian
touched upon a number of topics. Presenting his fourth Economic Survey, Subramanian said India could once again be the fastest-growing major economy in the world, and that higher borrowing by the Centre and states did not necessarily reflect on the underlying fiscal deficit. Subramanian said crude oil prices would be among the biggest challenges going ahead, and that stakeholders needed to be vigilant about record stock market levels. Edited excerpts:
On the forecast for 2017-18 and 2018-19
There is a sustained and robust broad-based revival. Manufacturing growth, GVA growth, and exports, all have picked up. The economy is picking up quite nicely. Growth is picking up partly because, temporary, the impact of the GST and demonetisation has dissipated; the government is driving demand. Going ahead, exports will be a major driver. You will see that manufacturing exports are growing at about 11 per cent, which is healthy and in line with global trends. Private investment going forward will depend on capacity utilisation and progress under the Insolvency and Bankruptcy Code. Whether or not consumption bounces back depends on oil prices going forward.
The real GDP growth projection for 2017-18 is 6.75 per cent, higher than the CSO’s estimate, in large part because the CSO has admitted it wasn’t able to take into account recent developments. We project a nominal GDP growth this year of 10.5 per cent. Next year, the growth will rise to 7-7.5 per cent. It is in the ball park of the IMF and the World Bank projections. That would once again make India the fastest-growing economy in the world.
On downside or risks to the Economic Survey’s projections
There are factors which we need to be very watchful about. The first is global crude oil prices. We know the rule of thumb: with every $10 increase in the price of oil, GDP growth comes down by 0.2-0.3 per cent. Inflation will also be higher by 0.2-0.3 per cent. We also have to watch sharp corrections to elevated stock prices. Stock prices are elevated. Having seen emerging market experiences for 20-25 years around the world, we have seen that when asset prices are high, there is a ‘sudden stall’ of capital flows. Macro policies will have to be tighter, and you will have a classic case of dilemma between stability and growth. The important thing is to understand why the Indian stock market boom is happening and how it is different from other nations. It also reflects a massive portfolio re-allocation to stocks from gold and other assets.
On the government’s policy agenda for the coming year
The saga of economic policy today is one of revival and risk. Stock markets are at record levels, indicating optimism and expectation. But interest rates are also high, which shows concerns about deficit. The government does not have to do anything radical next year. It is about finishing what has been started. The policy agenda for the year ahead should include supporting agriculture, stabilising GST, completing twin balance sheet actions with further reforms, privatising Air India, and to head off any probable pressure from oil prices.
On borrowing by the government and its impact on the fiscal situation
Markets are misinterpreting borrowing by central and state governments. Markets correlate in a 1:1 fashion market borrowings with the underlying fiscal deficit. That is not the right way to look at it. Our estimate is that about Rs 400 billion of extra borrowing by centre and states does not reflect on the underlying deficit. About Rs 600 billion worth of market borrowing is not to finance the deficit, but to move from national small savings fund to market borrowings. That additional borrowing that happened reflects a certain fiscal deficit which you will come to know on budget
On gender and ‘meta-preference’ for sons
When it comes to India’s skewed sex ratio, there is something deeper at work than preference for a son—there is something called “son meta-preference”. You infer that not by looking at sex ratio at birth, but by looking at the sex ratio of the last child. Is the last child a male or a female? That data is striking. The last child is mostly male, and when it is not the last child, it is mostly female. We estimate that there are about 21 million ‘unwanted girls’ in India.
On a large number of pending economic cases in the judicial system
If you look at the Supreme Court, high courts, the Income Tax Department, appellate tribunals, the stock of pending cases is high and rising. The next frontier in improving the ease of doing business is to reduce this strain on the judicial process and to get more timely and less delayed justice.
On the change in Subaramanian’s view in his first economic survey in 2015 that India was poised for a ‘double-digit’ growth
I think that relative to that assessment, a few things have happened. As they say ‘stuff happens’. I had underestimated the drag and overhang that the twin balance-sheet problem was exerting. That is changing. Things have happened, like demonetisation and GST. There have been effects of high interest rates and oil prices. We expect that we can go back to our medium-term potential, which is between 8-10 per cent.