The government’s economic survey, presented to parliament on Thursday, said India will face a challenge on the fiscal front following an economic slowdown impacting tax collections amid rising state expenditure on the farm sector.

File photo: Reuters

Bangalore:

India predicted on Thursday that economic growth in the current fiscal year could rise to 7% from 6.8% for the year that ended March 31, which was the slowest pace in five years.

“The growth in the economy is expected to pick in 2019/20 as macroeconomic conditions continue to be stable,” the finance ministry’s chief economic adviser Krishnamurthy Subramanian, the report’s main author, said.

In January-March, annual growth slumped to 5.8%, the slowest pace in 20 quarters. Growth for the financial year that ended in March already disappointed, and indicators such as plummeting industrial output and automobile sales have stoked fears of a deeper slowdown.

The projection comes a day before the government is due to unveil its budget for the 2019/20 year.

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 his political party said.

Modi won a second term with a landslide victory in general elections held in April and May.

A shortfall in monsoon rains, pivotal for the farm sector that constitutes about 15% of the economy, employing nearly half of India’s workers, has increased concern about rural distress and strengthened the case for government intervention.

A deepening liquidity crisis among India’s non-banking financial companies is also hurting private spending, hitting sales of everything from houses to auto parts.

India’s central bank, Reserve Bank of India (RBI) has cut benchmark repo rate by 75 basis points since February but the bankers have reduced lending rates by 10-15 basis points only as they are saddled with huge stressed assets amounting to near $150 billion.

The government report said accommodative monetary policy of the central bank could help decrease real lending rates and push investments.

Expert view: Anagha Deodhar, Economist, ICICI Securities, Mumbai

“The GDP growth of 7% for FY20 projected by the Economic Survey is in line with our expectations. High-frequency indicators show that growth in Q1FY20 remained weak and we expect Q2 to remain weak as well.

Assuming inflation of 3.7% in FY20, nominal GDP growth for FY20 is likely to be ~10.7%. Hence, we expect the government to revise the tax collection target downwards.

While aggregate capex growth is showing signs of bottoming out, it is largely driven by PSUs, while private capex growth remains weak. Hence, a broad-based and meaningful recovery in capex growth could take some time.

The survey argues that accommodative monetary policy is likely to cut real lending rates, however, we believe slow transmission is likely to limit gains.”