India is set to see growth accelerating to 7.2% in 2018-19 and 7.4% in 2019-20, up from the 6.7% in 2017-18, according to the United Nations’ World Economic Situation and Prospects 2018 report.
However, it said, while the outlook for India remained positive on the back of strong private consumption and public investment, the poor state of private investment remained a key concern. “Despite the slowdown observed in early 2017 and the lingering effects from the demonetisation policy, the outlook for India remains largely positive, underpinned by robust private consumption and public investment as well as ongoing structural reforms,” the report said. “Hence, GDP growth is projected to accelerate from 6.7% in 2017 to 7.2% in 2018 and 7.4% in 2019. Nevertheless, the anaemic performance of private investment remains a key macroeconomic concern,” the report added. “Gross fixed capital formation as a share of GDP has declined from about 40% in 2010 to less than 30% in 2017, amid subdued credit growth, low capacity utilisation in some industrial sectors and balance sheet problems in the banking and corporate sectors.”
“The GDP growth projections for 2017-18 reflects a sharp downward revision by 1% (as compared with the projection made for the year in last year’s report),” said N.R. Bhanumurthy, professor, National Institute of Public Finance and Policy, while presenting his comments on the report. “However, despite the two major disruptions in the year, only 1% has been shaved off. I think this will be a short term phenomenon, and growth will rebound.”
The report also said credit growth in India had remained subdued, especially in the industrial sector while also taking note of the fact that the government had sought to rectify this by trying to address the “elevated levels of non-performing loans” through large recapitalisation plans for State-owned banks and by implementing new insolvency proceedings.
Monetary policy
“Looking ahead, there exists some degree of uncertainty over the monetary policy stance in India,” the report said. “Subdued inflation, coupled with a good monsoon season, offers scope for additional monetary easing. However, if inflation accelerates faster than anticipated, the loosening cycle could end abruptly.”
With the 15th Finance Commission beginning its deliberations, Mr. Bhanumurthy also spoke about the need to consider reducing the 42% limit for the devolution of Central taxes to the States, as set by the 14th Finance Commission.
“After the Fourteenth Finance Commission, all reports say States have reduced their allocations on health and education,” Mr. Bhanumurthy said. “If the devolution is up to 42%, then this will have an impact on the inequality in the social sector, because the Centre can’t be expected to step in and invest in these sectors in the States that are not doing so.”
On fiscal deficit, Mr. Bhanumurthy said there was too much focus on the fiscal deficit as opposed to revenue deficit.
“I am okay with a slippage in the fiscal deficit on account of capital expenditure,” he said. “But we need to see what is happening with the 1.9% revenue deficit target. If there is slippage on that, then that means that capital expenditure is being squeezed.”
inflation accelerates faster than anticipated, the loosening cycle could end abruptly.”