Govt. lowers growth outlook, stresses supply-side reforms

Without reforms, GDP growth next year is unlikely to be significantly greater

India lowered its GDP growth projection for the current year to between 7-7.5 per cent against the earlier forecast of 8.1-8.5 per cent. The outlook going forward is challenging and, without reforms, GDP growth next year is unlikely to be significantly greater than this year, according to the government.

The cut in forecast follows GDP growth in the first half of the year (from April to September) slowing to 7.2 per cent from 7.5 per cent in the corresponding period last year.

Economic growth was dragged down by the 17.4 per cent decline in exports in the first half and the adverse impact of deficient monsoons on farm sector output.

Cause for concern

Nominal growth during this period also slowed substantially from 13.5 per cent to 7.4 per cent.

The sharp and continuing decline is a cause for concern, according to a mid-year review of the economy that Union Finance Minister Arun Jaitley tabled in the Parliament.

The slowdown will pose a challenge to meeting the fiscal deficit target of 3.9 per cent of GDP and will also place a stress on tax revenue collections.

Slower-than-anticipated nominal GDP growth will itself raise the deficit target by 0.2 per cent of GDP.

India’s debt-to-GDP ratio too will cease to decline, a development with significant implications for India’s macroeconomic stability and vulnerability to external risks.

The ratio had been declining over the past 10-12 years, benefiting from the nominal GDP growth exceeding the government’s cost of borrowing.

This, according to the review, has now reversed, with the wedge between the cost of borrowing and growth standing at a sizeable 2 per cent.

Borrowing requirements

The borrowing requirements aren’t expected to ease up with the review cautioning that the fiscal outlook for next year, 2016-17, looks challenging: “Government will need to reassess its commitment to cut the deficit further by 0.4 per cent of GDP”.

This assessment is critical, given global rating agencies have stated that India's sovereign rating is conditional on the pace of fiscal consolidation not straying from the committed path.

For the current year, though, despite the higher outgo toward OROP and the 7th Pay Commission, the shortfall in overall tax revenue collections as well as disinvestment receipts and slower-than-estimated growth, government will keep the fiscal deficit within the budget target of 3.9 per cent of GDP, Chief Economic Advisor Arvind Subramanian said.

‘Far superior’

Separately, addressing the Parliamentary Consultative Committee attached to the Ministry of Finance on the ‘State of Economy’, the Finance Minister said that steps taken by the government have ensured that the current macroeconomic outcome is “far superior” to that in early 2013-14.

He cited moves such as measures to boost growth through enhanced public investment, kick-starting stalled projects and improving business environment through reforms in policies and regulation.

During that time the situation was “worrisome” in terms of high current account and fiscal deficits with high inflation, high interest rates and low growth.

The review, however, cautioned that while the macroeconomy is stable, the real economy needs policy attention.

“Unless supply side reforms provide an impetus to growth, real GDP growth next year … is not likely to be significantly greater than this year.”

“There can be no relenting in the pace and direction of supply-side reforms,” the ministry said.

The subsidy gains this year from declining international oil prices won’t be available next year and there might be a let up in the tax buoyancy may not be as high either, according to the report. The new forecast of 7-7.5 per cent is more in line with the Reserve Bank of India's forecast of 7.4 per cent and the International Monetary Fund's projection of 7.3 per cent.