Economic Survey 2019 | GDP to grow at 7% in FY20, but fiscal challenges remain

India’s economy will grow at 7 percent in 2019-20, the Economic Survey 2018-19 projected on July 4, as it laced an optimistic note on the broader economy that is still smarting under agrarian distress, sluggish consumption spending and wobbly investment activity.

The Survey, the maiden one authored by Chief Economic Adviser Krishnamurthy V Subramanian, also flagged key fiscal challenges that loomed on the immediate horizon, obliquely advising the government against abandoning the laid down roadmap for meeting extra welfare spending.

"Improving the quality of expenditure remains the key priority. Meeting allocational requirements without diversion from the newly revised fiscal glide path remains the foremost challenge,” it said, as it laid down a five-year blueprint to turn India into a USD 5 trillion economy by 2024, clocking a sustained annual growth rate of 8 percent.

The primary challenges on the fiscal front in 2019-20 are lower revenues hammered by slower-than-expected growth and setting aside extra funds for schemes such as PM-KISAN without compromising the fiscal deficit target.

The Survey’s bullishness about growth prospects is predicated upon a quick turnaround in the investment activity amid hopes that companies will start adding capacities triggered by a quick revival in household spending.

India's gross domestic product (GDP) grew 5.8 percent in January-March, official data released on May 31 showed, which confirmed fears of a slowdown, as the new government assumed office amid expectations of a wide-ranging policy impetus to turnaround the economy.

Slowdown signs have been visible since last year, with GDP growing 6.6 percent in October-December 2018. The national income data have reinforced deceleration signs that were emanating from a slew of shop-end data, such as car and consumer goods sales, often seen as proxy indicators to gauge trends in household spending.

Fourth quarter corporate results have also shown a slowdown in profit growth across sectors. People are buying fewer cars and domestic sales, production and export of automobiles reflected this deceleration. Similarly, growth in fast-moving consumer goods (FMCG) have also slowed down considerably in recent quarters, mirrored in slowing sales of consumer staples, such as biscuits, soaps, oil.

The Survey, however, said that a high base effect in the January-March 2018 when GDP grew 8.1 percent and the uncertainty before a national electoral cycle as people remain in a wait-and-watch mode.

“In this quarter, election-related uncertainty may have also contributed to growth moderation,” the Survey said.

Stress in non-banking financial companies (NBFC) sector also contributed to the slowdown by adversely impacting consumption finance. Household consumption growth rate moderated considerably in January-March 2019, on account of lower NBFC lending, which in part led to low sales in the auto sector, it said.

Subramanian and his team are of the view that a strong political mandate will push growth, aided by policy consistency and the rapidity of reforms.

“The year 2019-20 has delivered a huge political mandate for the government, which augurs well for the prospects of high economic growth. Real GDP growth for the year 2019-20 is projected at 7 percent, reflecting a recovery in the economy after a deceleration in the growth momentum throughout 2018-19. The growth in the economy is expected to pick up in 2019-20 as macroeconomic conditions continue to be stable while structural reforms initiated in the previous few years are continuing on course,” it said.

To achieve the objective of becoming a USD 5 trillion economy by 2024-25, India needs to sustain a real GDP growth rate of 8 percent, which can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase, similar to what the high-growth East Asian economies have demonstrated.

According to the Survey, investment, especially private investment, is the key driver that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.

Exports must form an integral part of the growth model because higher savings preclude domestic consumption as the driver of final demand. Similarly, job creation is driven by this virtuous cycle.

Subramanian counters the argument that investment displaces jobs. “This remains true only when viewed within the silo of a specific activity. When examined across the entire value chain, capital investment fosters job creation as the production of capital goods, research and development and supply chains generate jobs”.

The Survey makes the case for investment as that key driver. By presenting data as a public good, emphasizing legal reform, ensuring policy consistency, and encouraging behaviour change using principles of behavioural economics, the Survey aims to enable a self-sustaining virtuous cycle.

Key ingredients include a focus on policies that nourish micro, small and medium enterprises (MSMEs) to create more jobs and become more productive, reduce the cost of capital, and rationalize the risk-return trade-off for investments.

The Survey makes a strong case for data as a “public good” which is “Of the People, By the People,” a significant observation given the recent controversy surrounding the government’s GDP and jobs-related data.