The National Statistical Office’s first advance estimates of gross domestic product (GDP) for the current fiscal year have projected India’s economic growth at 5 per cent, which is not a surprise, given that it is in line with what the Reserve Bank of India has given. But this is significantly lower than the 7 per cent projected by the Economic Survey in July. According to the government data, manufacturing is expected to grow by 2 per cent in the current year, compared with 6.9 per cent in the previous year. Similarly, growth in the construction sector, which is vital for jobs, is expected to collapse this year to 3.2 per cent, compared with 8.7 per cent in the last fiscal year. The growth in gross fixed capital formation is particularly worrying, as it is projected to collapse to just 1 per cent compared with 10 per cent in FY19. What has expanded at a faster pace compared with last fiscal year is government activity. However, with the given fiscal situation, this also has been coming under pressure.
In nominal terms, the economy is expected to grow by just 7.5 per cent, compared with the assumption of 12 per cent in the July Budget. Slower than expected growth will itself complicate matters. For instance, even if the fiscal deficit in absolute terms is contained at the targeted level, lower than expected growth in the size of the economy will push up the deficit as a percentage of GDP.
Besides, the government has to deal with a possible revenue shortfall of at least Rs 2 trillion. The fact that it may not be able to achieve the disinvestment target will only add to the problem. Consequently, the government is likely to compress expenditure by about Rs 2.2 trillion. Given the revenue situation, some expenditure rationalisation would be indispensable, but the government will need to be mindful of its impact on economic activity. As the data shows, without the support of government expenditure, growth would have been even weaker. Slower nominal growth will also affect Indian businesses and make debt repayment more difficult. This can put pressure on the banking system and affect the flow of credit.
Chances of revival have been further clouded by renewed geopolitical tension in West Asia. A possible disruption in crude oil supplies and higher prices will affect both global and domestic growth. The rise in oil prices and the depreciation of the rupee can push up the headline inflation rate, which will reduce the possibility of an interest rate cut in the near term. While an orderly depreciation of the rupee will help Indian exporters, a rise in global risk aversion could lead to higher volatility in the currency market. Nevertheless, as things stand today, risks in financial markets would somewhat be balanced by the accommodative stance of large central banks. Although there are global risks to growth, India’s challenges at the moment are mainly domestic. Therefore, with a fresh assessment of the state of the economy, which clearly is not encouraging, all stakeholders would now look forward to the Union Budget to see how the government plans to revive growth. The first step towards this goal would be to accept the real economic and fiscal situation.