Growth estimate subdued, can force fiscal stimulus in Budget

Jan 7, 2020
New Delhi: The government on Tuesday forecast 5 per cent growth for the current financial year, which is the slowest pace in 11 years, and may force the Finance Ministry to think of more measures on fiscal stimulus when the budget is presented next month.

Finance Minister Nirmala Sitharaman last week unveiled a plan to invest Rs 102 trillion in infrastructure over the next five years in a bid to make India a $5 trillion economy by 2025. Before that last year, the government had already cut corporate taxes to the tune of Rs 1.45 lakh crore.

The most anticipated fiscal stimulus now is a cut in income tax rates in the Budget, to be presented in February 1.

The economic growth has slowed to 4.5 per cent in the July-September quarter, the weakest pace since 2013, on weakening demand and private investment, putting pressure on Prime Minister Narendra Modi to speed up reforms as five rate cuts by RBI have failed to help.

The gross domestic product is estimated to grow 5 per cent in 2019-20, slower than the 6.8 per cent growth of 2018-19, the Ministry of Statistics said on Tuesday.

N.R. Bhanumurthy, a senior professor at National Institute for Public Finance and Policy, told IANS this 5 per cent growth projection should give spin for going for a strong fiscal stimulus even at the cost of fiscal deficit.

Sunil Sinha, India Rating’s principal economist, said the economic landscape has deteriorated so fast that FY20 is turning out to be a year of rapid downward growth revision. The first advance estimate of the National Statistical Office’s (NSO) pegs it at 5 per cent, which is the lowest since FY09. All along, the high frequency data had been hinting at the slowdown, but the severity of economic slowdown has caught all by surprise.

However, Pronob Sen, former Chief Statistician of India, does not think so, saying that the numbers won’t put the Finance Ministry in a bind to go for huge stimulus.

“Today’s estimates show the government is expecting a little upswing in the growth but its just an expectation. This estimate is for budget, not for analysis. More important will be the second estimates (which will come on February 28) and will be more keenly analysed on growth trends. The first estimates say the first half of the year had a growth of 4.7% and the second half the economy can have a 5.3% growth estimated , so too much not be read into this.

But this first estimate is an indicator of an uptick in the second half, but there is no green shoots as such being just a projection, its not hard data. This number will be used as a denominator for all budgetary ratios — tax-GDP ratio, fiscal deficit, revenue deficit . But this data won’t force the finance ministry to do anything extra,” Sen told IANS.

The Statistics Ministry will release growth data for the October-December quarter on February 28 on second advance estimates with revised full-year growth estimates.

Aditi Nayar, the principal economist of ICRA, said: “The advance estimates for the full year FY 2020 have been based on data available for a period of 6-9 months for different sectors. The pickup displayed by various lead indicators in November-December 2019 is encouraging, and portends a modest improvement in economic growth in H2 FY2020. Moreover, the YoY rise in rabi sowing amid healthy groundwater and reservoir levels, bodes well for agricultural growth and rural sentiment, particularly in the ongoing quarter.

“However, the momentum of spending by the Central Government dipped in October-November 2019, and we are apprehensive that revenue concerns may necessitate an expenditure squeeze by the Central and state governments in the ongoing quarter, which has emerged as a key risk to the pace of economic growth.”

Nayar, though, put out a slight bright picture saying for FY2020 as a whole, they expect GVA and GDP growth to print at 5.1 per cent and 5.3 per cent, respectively, modestly higher than the advance estimates of 4.9 per cent and 5 per cent.

All the key sector growth estimates are low with manufacturing forecast to grow 2 per cent in 2019-20, compared to 6.9 per cent growth in 2018-19. Construction is likely to grow 3.2 per cent in 2019-20, compared to 8.7 per cent the previous year, while the farm sector is forecast to grow 2.8 per cent, compared to 2.9 per cent a year earlier, the ministry said.

Economists expect growth to pick up in the next fiscal year while data so far this year points to a weaker-than expected activity, with global trade tensions and rising crude oil prices posing risks.

The unemployment rate rose to 7.7 per cent in December from 7 per cent a year earlier, data released by the Centre for Monitoring Indian Economy, a Mumbai-based think tank, showed.

Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services said: “Slowdown in India’s manufacturing sector and IIP numbers in first half of FY19-20 has resulted in reducing growth. India’s GDP growth during the FY19-20 is expected at 5 per cent as compared to 6.8 per cent in year-ago period, according to the first advance estimates released by Statistics Ministry. This has forced RBI to downgrade it’s GDP forecast to 5 per cent for 2019-20 in last policy (Dec policy) from 6.1 per cent in its October policy.”

Sinha said: “Even the bellwether of Indian economy, the services sector, has slowed down considerably to 6.9 per cent in FY20 from 7.5 per cent and 8.1 per cent in FY19 and FY18. respectively. Here again excluding the government expenditure (which is captured under the head of public administration, defence and other services), the services sector growth declined to 6.1 per cent (FY19: 7.2 per cent). However, the biggest fall in growth has been recorded by two employment intensive sectors namely construction and manufacturing. While construction sector growth slipped to six year low at 3.2 per cent in FY20 (FY19: 8.7 per cent), manufacturing growth dipped to 2 per cent which is a 15-year-low (FY19: 6.9 per cent).”

“A glance though the demand side also suggest that with the exception of government expenditure, all other demand drivers, namely private consumption, investment and net exports, are down and out. The growth slowdown, especially in private consumption, to 5.8 per cent in FY20 from 8.1 per cent in FY19 has taken the sting out of FY20 GDP growth because this alone constitutes 57.4 per cent of the total GDP. Ind-Ra believes even advance estimate of 5 per cent GDP growth is not sacrosanct.

“There are risks. In this estimate, it has been assumed that private consumption, government expenditure and investment will grow at 7.3 per cent, 8.5 per cent and (-) 0.5 per cent respectively in 2HFY20 (1HFY20: 4.1 per cent, 12.3 per cent and 2.5 per cent). Among these, the assumption relating to private consumption looks somewhat unrealistic if festival demand is taken as an indicator,” he added.
IANS