Economic Survey 2019: India needs 8% growth to be $5-trn economy by FY25

The Survey, however, cautions that the country might face a challenge from an economic slowdown impacting tax collections amid rising state expenditure on the farm sector

Economic Survey 2019, tabled in Parliament on Thursday, painted an optimistic picture of the Indian economy, projecting the country’s gross domestic product (GDP) would grow at seven per cent in 2019-20, against a five-year low of 6.8 per cent the previous year, with political stability aiding a pick-up in demand and investments. India would need to grow at 8 per cent annually to become a $5-trillion economy by FY25, the Survey estimated.

The forecast is the same as the Reserve Bank of India’s reading, which in June lowered its projection by 20 basis points from 7.2 per cent. A gloomy global outlook spawned by US-China trade tensions also prompted the central bank to cut interest rates three times this year, with the focus now shifting to the government’s Budget on Friday for measures to support the economy.

The finance ministry said in its annual Economic Survey report that upside and downside risks to growth were evenly balanced, with monsoon rainfall seen tipping the scales. “The political stability in the country should push the animal spirits of the economy, while the higher capacity utilisation and uptick in business expectations should increase investment activity,” said the Survey, authored by Chief Economic Advisor Krishnamurthy Subramanian.

Prime Minister Narendra Modi's government is widely expected to push up spending to spur economic growth through tax incentives to boost consumer demand and investment, officials of the Bharatiya Janata Party (BJP) said. Modi won a second term with a landslide victory in general elections held in April and May.

The Survey, however, cautioned that the country might face a challenge from an economic slowdown impacting tax collections amid rising state expenditure on the farm sector.

The investment rate, meanwhile, is expected to pick up following an improvement in consumer demand and bank lending. The RBI’s easy monetary policy is expected to lower real lending rates, helping boost credit growth and revive investment in the coming months, according to the report on the state of the economy. Further, the narrowing in bad-loans ratio is seen helping boost the capital expenditure cycle.

Oil prices staying well below their 2018 peak is also a positive for consumption, which accounts for about 60 per cent of GDP, the Survey said. Still, a rebound in consumption is tied to a recovery in farm sector growth, which in turn depends on rainfall. The other downside risks include weaker exports growth and a spillover of the stress in shadow banking sector to this year.

A shortfall in monsoon rains, pivotal for the farm sector that constitutes about 15 per cent of the economy, employing nearly half of India's workers, has increased concern about rural distress and strengthened the case for government intervention. As much as 69 per cent of the country got deficient rainfall during June 1-July 2 period, according to the weather office. 

“Some regions are expected to receive less than normal rains,” the survey said, underlining the risks. “On balance, the prospects of the economy should improve.