Govt pares growth forecast to 7-7.5%

Mid-year economic analysis confident of meeting this year's fiscal deficit target, but hints at deferring fiscal deficit target dates

The government on Friday lowered its forecast for gross domestic product (GDP) growth to 7-7.5 per cent in this fiscal year, down from an earlier forecast of 8.1-8.5 per cent. Though it stuck to the fiscal deficit target of 3.9 per cent of the GDP for the year, Chief Economic Advisor Arvind Subramanian said at a press conference that the target of 3.5 per cent looks challenging for next year.

The mid-year economic analysis tabled in Parliament struck a note of caution by saying there was a case for re-assessment of the medium-term fiscal consolidation road map because of the additional expenditure due to the recommendations of the Seventh Pay Commission and the higher pension payout for defence veterans next year.

“If the government sticks to the path for fiscal consolidation, that would further detract from demand. On these assumptions, and unless supply side reforms provide an impetus to growth, real GDP growth next year based on an analysis of demand is not likely to be significantly greater than growth this year,” the report said.

The mid-year review, which was prepared by Chief Economic Advisor Arvind Subramanian and his team, examined the trends in receipts and expenditure for the first two quarters of the year in relation to the budget and provided a statement explaining deviations in meeting the government’s fiscal obligations.

The analysis said weak exports and low private sector investment were among the reasons for lowering the GDP growth forecast.

“Given the challenges, we estimate that real GDP growth for the year as a whole will lie in the 7-7.5 per cent range,” the report said. It forecast nominal GDP growth for the year at 8.2 per cent.

“The economy is recovering, but it is hard to be definitive about the strength and breadth of the recovery for two reasons: the economy is sending a mixed signal and there is some uncertainty on how to interpret the GDP data. The data uncertainty is, in fact, reflected in the mixed, sometimes puzzling, signals emanating from the economy,” Subramanian told reporters after the tabling of the analysis.

The report said, “Both direct and indirect tax collections have registered a dramatic increase in buoyancy in the first half of 2015-16 compared to the average of the previous three years.”

This would be the prime reason that the fiscal deficit target for the year would be maintained, Subramanian said. While making a case for setting a more realistic disinvestment target for next year, he said there would not be any expenditure cuts in the fourth quarter of this fiscal year.

According to the latest roadmap laid out in the budget for 2015-16, the government is targeting a fiscal deficit of 3.5 per cent in 2016-17 and 3 per cent in 2017-18. By Subramanian’s assessment, these numbers may now have to be reviewed. "The deficit target of 3.9 per cent this year will be met, but 3.5 per cent next year looks more challenging," he said.

“As long as oil prices do not decline further and remain around $50 per barrel, the additional boost to consumption that the economy received this year – of about 1-1.5 percentage points – is likely to recede,” the report stated.

It, however, forecast a pickup in exports and said there was a need to continue boosting public sector investment in infrastructure, something that was done this year. Subramanian added in the press conference that the current account deficit would be in the range of 1-1.2 per cent next fiscal year.

The report said retail inflation was likely to remain within the RBI's target of about 6 per cent. Subramanian later said inflation had moderated significantly. Underlying determinants like rural wages and farm support prices were also moderating and foreign exchange reserves had risen to about $352 billion.

"The rupee has been very stable. The focus on the rupee-dollar rate conveys a misleading impression about the stability of the rupee. If you measure it against a basket of currencies, it has actually been quite stable," he said.

Subramanian also pitched for continuing with reforms to boost supply. He added that the GST, bankruptcy code and measures to boost agricultural output were some of the major steps this government would need to take.

Subramanian said fiscal and monetary policy must be framed to take into account the decline in nominal GDP growth. There was a need to boost demand, he added.
WHAT THE CEA SAID

For current financial year

• Sees GDP growth at 7-7.5% vs 8.1-8.5% earlier
• Says fiscal deficit target of 3.9% of GDP will be maintained
• Says weak private investment and exports among prime reasons for forecast cut
• Says no need for expenditure cuts to meet fiscal deficit target
• Says revenue buoyancy in H1 encouraging
• Says mixed signals coming from economic data; sees nominal GDP growth at 8.2%

For next financial year and beyond

• Sees OROP/Pay Commission burden on expenditure
• Says fiscal consolidation road map needs to be reassessed
• Says if fiscal road map maintained, it may affect demand and thus growth rate
• Says continuing need to maintain high levels of public spending in infra
• Says benefits from low oil prices may not be as visible next year
• Forecasts pick-up in exports