Economic Survey prescription: Beat investment slowdown with public spending

The Survey is pessimistic on investment, and consequently on adverse contribution to growth, arguing that India's investment slowdown might be difficult to reverse

The detailed and innovative analysis of the past few Economic Surveys was ratcheted up in FY18, with the goods and service tax (GST)-enabled data deluge providing insights on structures, agents and their interactions, for example on inter-state trade. Happily, this will allow policy to be increasingly tuned and targeted. Indeed “a new planet swims into his ken”. This article, regretfully, has space only for a couple of high-level observations. 

First, assumptions on the macroeconomic scenario, likely to be used for the FY19 Budget. A 7-7.5 per cent forecast for gross domestic product (GDP) growth is eminently feasible, given that indirect tax collections contribute to the difference between GDP and the underlying gross value added (GVA). The Survey estimates a 12 per cent increase in indirect taxes, compared to the budgeted 8.8 per cent for FY18, likely to rise in FY19. 

The Survey estimates a $10/barrel increase in oil cuts 0.2-0.3 per cent of GDP growth and raises the oil import bill by $9-10 billion, and the forecast for FY19 is an average $68/barrel (vs $57 in FY18). Other than higher oil imports, the current account deficit is also at risk from lower remittances. Although the Survey is sanguine about this, political uncertainty and fiscal tightening in West Asia might adversely impact migrant incomes and remittances. On the whole, it is probably advisable to be conservative on economic forecasts, given rising global risks.

Arvind Subramanian addresses press conference on Economic Survey 2018

Second, the Survey feels that fiscal developments at the Centre cannot rule out a pause in the Government fiscal consolidation (relative to FY17). This is a change in stance from the FY17 Survey, which argued strongly against an unwarranted counter-cyclical debt build-up. The “pause” is open-ended, and might spill over to FY19 as well. The point is well taken on a fiscal slippage (for FY18 at least), given the higher borrowings proposed for Q4, which corresponds to a larger fiscal deficit (FD) than the budgeted 3.2 per cent. However, the sharp rise in bond yields constrains the policy space for a stimulus.  

The reasoning for the expected fiscal slippage is also laid out. The Survey is quite pessimistic on investment, and consequently on the adverse contribution to growth, arguing that India’s investment slowdown might be difficult to reverse, being unusually large and stemming from balance sheet stress. The implicit argument in this is the need for compensatory increase in public investment to revive growth. 

Although this sounds right (given the sharp rise in corporate leverage), there is a problem in reconciling the slowdown in private investment in GDP data with balance sheet stress. Household fixed asset investment gross fixed capital formation had fallen from 15.7 per cent of GDP in FY12 to 10.8 per cent in FY16, while private sector investment stayed more or less flat from 11.2 per cent of GDP to 11 per cent. The drop in HH investment is unlikely to have been caused by corporate balance sheet stress. This point is important, since it will have implications for the choice of the investment stimulus (affordable housing vs bank recapitalisation, for example).