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India set to bounce back at 6% growth

Issac John /Dubai
Filed on February 1, 2020 | Last updated on February 1, 2020 at 06.07 am
Chief Economic Advisor KV Subramanian speaks at a media interaction in New Delhi

(PTI Photo)

The Economic Survey favors pro-business policies and cautions against pro-crony policies that lead to wealth erosion.

India, Asia's third-largest economy, will bounce back from a five per cent growth in 2019-20 to six to 6.5 per cent growth in the next fiscal year 2020-21 starting from April, the much-awaited The Economic Survey, projected on Friday, ahead of the budget to be unveiled today.

The survey, a detailed report card on the country's economic performance tabled in Parliament by Finance Minister Nirmala Sitharaman, said while weak global growth is impacting India, an investments slowdown due to financial sector issues had led to growth dropping to a decade-low in current fiscal.

The survey was presented as the budget session kick-started with an address by President Ram Nath Kovind to both the houses in the Central Hall of Parliament.

Setting the tone for the annual budget, the document observed that five per cent growth projected for 2019-20 the lowest in 11 years - against the earlier estimate of seven per cent in July 2019. Analysts said to achieve the dream $5 trillion goal within the targeted time-frame of 2025 from the current $2.936 trillion, India has to grow at a turbo-charged 11.24 per cent compounded annual rate over five years from now.

They argued that even assuming that the economy, currently the world's seventh-largest, and is poised to mark a watershed this year by crossing the $3 trillion mark by mid-2020, could make a modest rebound in 2020-21 as projected at six per cent, and maintain that growth momentum over the next five years, it can only hope to reach $3.93 trillion, more than trillion short of the $5 trillion goal.

Addressing a press conference in the afternoon on Friday, Krishnamurthy Subramanian, Chief Economic Advisor (CEA), said the survey is a synthesis of the old and new. "We have a slowdown in the Indian economy, part of it is because of the global economy slowing down in 2019."

He said if wealth had not been eroded by willful defaulters, "we could have spent almost double the amount on social sectors."

Subramanian called for measures to enable markets, promote 'pro-business' policies and strengthen 'trust' in the economy. Ethical wealth creation key to India becoming a $5 trillion economy by 2025, said the survey.

According to the CEA, India's banking sector needs to scale up and become proportional to the size of the Indian economy. The survey proposed creation of Fin tech Hub for PSBs - the Public Sector Banking Network (PSBN) Part-Ownership of PSBs by employees through Employee Stock Option Plans.

"Change in composition of (BSE) Sensex over the years shows that pro-business policies give a level playing field, providing opportunities to all and keeping incumbents on their toes," he said.

Citing examples of 2G spectrum scam, the Chief Economic Advisor has cautioned the government against policies that favor a few firms over the larger welfare of all. The Economic Survey favors pro-business policies and cautions against pro-crony policies that lead to wealth erosion.

The Economic Survey also observed that over Rs4.3 trillion of taxpayer money is invested as the government's equity in PSBs. In 2019, every rupee of taxpayer money is invested in PSBs, on average, lost 23 paise. The state of the banking sector in India, therefore, needs urgent attention, it said.

"Laws which have outlived their relevance can cause unintended negative consequences. For example, The Essential Commodities Act needs to make a distinction between storage and hoarding," Subramanian noted. Government interventions like debt waiver or food subsidies end up creating distortions in the functioning of the free market. The survey said that debt waiver schemes disrupt credit culture and disrupt formal credit flow to the very farmers it aims to benefit.

According to the survey, which was printed in lavender colour - the same as the colour of the new Rs100 currency note - growth slipped to 4.5 per cent in the July-September quarter. The uptick in the second half of 2019-20 would be mainly due to ten positive factors like picking up of NIFTY for the first time this year, an upbeat secondary market, higher FDI flows, the build-up of demand pressure, positive outlook for rural consumption, the rebound of industrial activity, steady improvement in manufacturing, growth in merchandise exports, a higher build-up of foreign exchange reserves and positive growth rate of GST revenue collection.

It noted that the share of formal employment increases from 17.9 per cent in 2011-12 to 22.8 per cent in 2017-18 reflecting formalisation in the economy.

The survey said for wealth to be distributed, it first has to be created and called for looking at wealth creators with respect. The survey said government interventions seem to be ineffective in stabilising prices of commodities such as onions.

For boosting growth, it called for new ideas for manufacturing such as 'assemble in India for the world' which will create jobs. To further make it easier to do business, the pre-budget paper called for removing the red tape at ports to promote exports as well as measures for easing the start of business, register property, pay taxes and enforcing contracts.

The survey also called for improving governance in public sector banks and the need for more disclosure of information to build trust. It also talks about dwarfism in the banking sector.

The document, which maps the state of India's economy, noted that the downward slide in the country's GDP has bottomed out. The overarching theme in this year's economic survey is "Wealth Creation" and spells out 10 new ideas to achieve this.

The survey noted that annual economic growth slowed to 4.5 per cent in the July-September quarter, the weakest pace since 2013, owing to weakening demand and private investment. Earlier this month, the ministry of statistics said in a statement that GDP is estimated to grow 5.0 per cent in 2019-20, slower than the 6.8 per cent growth of 2018-19.

Analysts noted that the slowing growth has put pressure on the government to expedite reforms as five rate cuts by Reserve Bank of India has hardly helped. It will also likely push finance minister to go for extra fiscal stimulus when she presents the annual budget today.

Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said that the Economic Survey 2019-20 focused on the importance of market forces in economic growth and development. "Importantly, with wealth creation as an overarching theme of the survey, continues to push forward with the vision of the $5 trillion economy over next few years. The details of the survey are also encouraging with focus on exports, lower government interventions, establishing trust as a public good, targeting ease of doing business, privatisation, etc. clearly outlines the government's approach to boosting potential growth of the economy."

Dr Niranjan Hiranandani, president of Associated Chambers of Commerce of India (Assocham), said proactive measures should be undertaken to push India among the top 50 nations in the global pecking order of ease of doing business mechanism and make it globally competitive market. "We strongly recommend bold fiscal stimulus in the labor-intensive sectors which shall have a domino effect to enhance employment generation and GDP ratio."

Hiranandani said Assocham strongly advocates that the central government needs to announce bolder policy and fiscal measures to recover from sharp economic downturn and somnolent market scenario. "The success of economic green shoots lies in connecting the right dots for economic prosperity in an immediate time frame."

The projected much tepid growth on the expected lines for the year 2019-20 at five per cent reveals that growth has bottomed out. The Economic Survey highlighted the need to relax fiscal slippage in terms of prudent spending with a primary objective to bounce back from economic doldrums.

If predictions by the private equity firm Blackstone are to be believed, in 2020, the Modi government is likely to continue business-friendly growth reforms, and the Indian economy is likely to grow at six per cent, while the markets could rise by up to 20 per cent.

The International Monetary Fund in its October 2019 forecast had also projected 6.1 per cent growth for India in 2019 with the prospects to hit seven per cent in 2020. Therefore, even in the most upbeat scenario of an annual 7.5 per cent growth like in the 2014-18 period, it will take 7.5 years for India to hit the $5 trillion target. Auditing firm EY has said India not only would need to grow by nine per cent every year for five years continuously but also raise aggregate investment rate to 38 per cent of GDP to achieve the target of turning India into a $5 trillion economy. -


Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.

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