The Finance Minister tabled the Economic Survey (ES) 2019 in the Parliament today. This survey reviews the economic developments in India, over the past year and being drafted by a team headed by the Chief Economic Advisor, (CEA), it is meant to be an authentic statement on the present state of the Indian economy. With a continued slowdown in the Indian economy during the past few quarters, being the mother of all that ails it, the focus of the ES 2019, has been on the revival of growth and investment, both of which have been languishing and go hand in hand. While the Modi 1.0 government denied this worrisome slowdown by doctoring economic statistics, yet with agencies like the World Bank, IMF etc. pointing it out, and the bitter elections being over, the Mod 2.0 government too accepted this burning reality and has set up a high powered cabinet committee to look into the problem of receding growth and investments. The fact is that the March 2019 quarter GDP growth at 5.8% has been the lowest in 17 quarters and the annual growth rate of 6.8% in FY 2019, has been the slowest in five years.
The ES 2019 says that the March 2019 quarter slowdown was due to the election related uncertainty and the NBFC crisis, but that is not quite true, since despite the election being over, there is no pickup in activity and it is estimated that the slowdown in the Indian economy will continue for the next two quarters, and is likely to pick up only thereafter. The ES thus very optimistically projects the FY 2020 annual GDP growth rate at 7% and has made the PM’s target for India to be a USD 5 trn economy by 2025, to be its central survey theme. It points out that India will need to login an annual growth rate at 8% to reach this ambitious USD 5 trn target, which other experts says must be at least 11%, if we are to reach there.
As part of its focus on growth and the urgent need to reverse the present slowdown, and to also revive fresh investments which will be the main engine of such growth upsurge, the ES says that the investment slowdown has bottomed out and that for various reasons, there will be a sharp resurgence of India’s growth rate and investments in the economy. The reasons why the ES sees green shoots of revival in the economy, as also in fresh investments are diverse and are as under:-
- Political stability will aid the pick up in consumer demand and in investments.
- Receding interest rates under a loose monetary policy being pursued by the Reserve Bank, will boost credit growth, fresh loans and new investments.
- The bad loans ratio of banks has narrowed and with this improvement in balance sheets, there will be an upsurge in the capital expenditure cycle.
- Capacity utilisation is increasing, resulting in an uptick in business expectations.
- A benign government policy will lift FDI restrictions leading to an increase in fresh investments.
- A recovery in consumption, will boost GDP growth.
While the CEA has rightly focussed of India’s economic slowdown as a burning issue and may have political compulsions to paint a rosy picture of the same, he betrays certain flaws in his reasoning. He says that political stability will be the key driver of India’s growth in the coming years, but in saying so, he ignores the fact that the present economic slowdown has its roots in the 2014-2019 period, when there was a stable government at the Centre. He expects a rebound in fresh investments, unmindful of the fact that till confidence is not restored, the consumer will not spend and the investor will not invest either. He also overlooks the ground realities of ease of doing business, which discourage an investor from risking his capital. And with rural sector demand languishing there will be no pick up in capacity utilisation, such that new projects are set up.
So, revival of growth and investments will need serious and sincere policy effort by the government. But here is what the ES predicts for tomorrow’s budget. Expect no income tax rate cuts, further liberalisation to encourage foreign investments will be announced, further recapitalisation of public sector banks will take place, there could be tax incentives for fresh investments, and there are severe constraints on the government’s ability to invest, with the drain on the treasury due to populist spending continuing.