India's economy seen growing at 5.5% in current fiscal

news
19 December 2014

India's economy is expected to grow at an accelerated pace of 5.5 per cent in the current financial year, against 4.7 per cent last fiscal, on the back of an improvement in the macro-economic situation, according to the finance ministry's mid-year economic review.

And, despite challenges like subdued revenue collection, the review says a 7-8 per cent growth in the gross domestic product is ''within reach'' in the coming years.

The government's optimism stems from positive investor sentiment since the government took over, a slowing of inflation, and surging capital inflows and market capitalisation by corporates, although the country's current account deficit has widened.

The government since coming into office has taken a number of policy actions, including deregulation of diesel, raising the price of natural gas, direct transfer of subsidies for cooking gas, moderating inflationary pressures in agriculture, increasing foreign direct investment caps in defence with planned increases in railways, expediting financial inclusion, and moving toward deregulating coal. These actions combined with favourable external developments in the form of declining oil and commodity prices have helped improve the macroeconomic situation, and business and investor sentiment, says the review.

The government said, despite slower than expected revenue growth, it is firmly committed to meeting fiscal deficit target for this year, and the mid-year review highlights the unusually challenging circumstances facing the government, which include:

  • Slower than expected GDP growth affecting revenue growth;
  • Revenue projections in the budget not materialising;
  • Legacy of past expenditures weighing on the budget; and
  • The difficulty in achieving fiscal consolidation when growth slackens.

Inflation has come down dramatically for four reasons: policy actions by the RBI and the Government, declining agricultural prices; declining oil prices; and the economy growing slower than its potential.

''Going forward disinflationary impulses especially from agriculture, external and domestic, are strong, reflected for example in rapidly declining rural wage growth. The declining trend of inflation is likely to continue, with strong potential to surprise on the upside,'' the survey points out.

The Mid-Year Economic Analysis 2014-15, tabled in Parliament, also assumed that the Reserve Bank of India would maintain status quo in the interest rate till March 2015, and a stable outlook for rupee. Industry has been demanding a cut in interest rate amidst slowing industrial production.

''Investment is yet to pick up significantly. But on the upside inflation has come down dramatically...The year (2014-15) could end with growth around 5.5 per cent,'' it said.

The GDP growth was sub-five per cent in the past two financial years.

The review, however painted a rosy growth prospect in the medium term saying, ''The trend rate of growth of about 7-8 per cent should be within reach. With basic 'public good' provision and investment tapping into cheap labour, India can easily get closer to its growth frontier laying a strong foundation for the long-run.''

The review expects the retail inflation based on the Consumer Price Index to be in the range of 5.1-5.8 per cent in the next five quarters.

As per the report, there are stalled projects to the tune of Rs18,00,000 crore (about 13 per cent of GDP) of which an estimated 60 per cent are in infrastructure.

"In turn, this reflects low and declining corporate profitability...The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 per cent of total assets," it said.

It further said that "displaying risk aversion," the banking sector is increasingly unable and unwilling to lend to the real estate sector.

On the way forward for growth, it said first, the backlog of stalled projects needs to be cleared more expeditiously, "a process that has already begun".

The review said that going forward, there is a great reason for hope because in addition to important reforms such as liberalising FDI in insurance, "two game-changing" reforms are on the horizon.

These are, the increasing use of direct transfers (combining Aadhaar with Pradhan Mantri Jan Dhan Yojna), and the Goods and Services Tax (GST).

"In sum, there is growing ground for hope but narrowing room for complacency," the report said.

It further said despite the sprouting of green shoots, a robust recovery has still to fully take hold.





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