Economy needs more realistic approach, not mere attractive phrases

The Economic Survey 2018-19 is euphemistic in tone. A little despair on account of much troubled economy has been taken away instilling a little hope through attractive phrases and portraying an ailing economy as potentially a great economy of the future. Survey departs from traditional Anglo-Saxon thinking by viewing the economy as being either in a virtuous or a vicious cycle, and thus never in equilibrium, and then goes on claiming that the ‘virtuous cycle’ has begun indirectly saying that ‘vicious cycle’ has ended for good. However, the heart of the matter is that the present Indian economy is under great duress, under ‘viscious cycle’ both in domestic and external sectors.

Let us have a look at External Sector first. On India’s External Sector, though the Economic Survey states that it continues to be stable, the Current Account Deficit (CAD) has increased to 2.1 per cent of GDP in 2018-19, up from 1.8 per cent in 2017-18. It can create a very difficult situation which the survey says ‘is within manageable levels’. The widening of CAD was due to deterioration in trade deficit from 6.0 per cent of GDP in 2017-18 to 6.7 per cent in 2018-19 which does not augurs well for the economy. The rising trend in crude oil prices may effect further deterioration in the trade deficit. Only consolation is that acceleration in the growth of remittances has prevented a larger deterioration of CAD. Can this level of CAD be managed? The survey says that the trend of the total liabilities to GDP ratio inclusive of both debt and non-debt components, a rise in the share of foreign direct investment, and a fall in the net portfolio investment in total liabilities reflect a transition to more stable source of funding CAD. In sum, although CAD to GDP ratio has increased in 2018-19, the external indebtedness continues to be on a declining path, the survey emphasizes.

The Survey notes that India’s foreign exchange reserves continue to be comfortably placed in excess of USD 400 billion. Though it is reassuring a little, the depreciation of the rupee against USD is potentially dangerous. The Rupee traded in the range of 65-68 per USD in 2017-18 but depreciated to 70-74 in 2018-19. Moreover, the exchange rate in 2018-19 has been more volatile, mainly due to volatility in crude prices. The survey tries to downplay it by stating that the exchange rate volatility is ‘not much due to net portfolio flows.’ The Real Effective Exchange Rate also depreciated in 2018-19, making India’s exports potentially more competitive. The income terms of trade, a metric that measures the purchasing power to import, has been on a rising trend. The reason the survey states that it is possibly because the growth of crude prices has still not exceeded the growth of India’s export prices.

India’s External Debt at end-December 2018, 1.6 per cent than its level at end-March 2018. The long-term debt declined by 2.4 per cent though its share was mostly same at 80.1 per cent of total external debt compared to 80.7 per cent during the same period. Such stagnation was more or less registered also in the composition of India’s exports and import basket. It reveals that India needs much to do to in this respect because the trade deficit was USD183.96 billion during the period. Since India’s main trading partners continue to be the US, China, Hong Kong, the UAE and Saudi Arabia, the country needs to protect itself from the ill effects of the trade war.

On domestic sector also the economic survey is more emphatic on portraying the ‘potentially great Indian economy’ such as $5 trillion economy by 2024-25. It is just half at present. The economic survey emphasizes that to achieve this goal the country will need 8 per cent of sustained growth in years to come. The authors of the survey have talked much about the ‘virtuous cycle’ implying that the status of the economy augurs well for the future. However, the document itself belies it.

The macroeconomic view presented in the survey says that the growth of GDP has moderated to 6.8 per cent in 2018-19 from 7.2 per cent in 2017-18. It has just avoided the word ‘declined’ seemingly to soften the impact of the word in our mind. The inflation is contained at 3.4 per cent in 2018-19, but it is more so because of the low agricultural prices which tells another story that our farmers are at the receiving end against the promise given to them for doubling their income within three years from now. Non-Performing Assets as percentage of Gross Advances reduced to only 10.1 per cent at end December 2018 from 11.5 per cent at end March 2018

On money management and financial intermediation, the survey notes that the Banking System has improved as ratio of NPA has declined and credit growth accelerated. The statement needs a careful consideration because it involves Insolvency and Bankruptcy Code through which the issues are being resolved. Moreover, the RBI has reported that only 50,000 crore rupees have been received by banks from previously non-performing accounts. Liquidity conditions has remained systematically tight. Financial flows remained constrained because of decline in the equity finance raised from capital markets and stress in the NBFC sector. Capital mobilized through public equity issuance declined by 81 per cent in 2018-19. Credit growth rate y-o-y of the NBFCs declined from 30 per cent in March 2018 to 9 per cent in March 2019.

India’s Sustainable Development Goal index is still very low between 42 and 69 for States and between 57 and 68 for UTs, which reflect poor performance of the government, though the Economic Survey is full of beautiful phrases creating great hope for the future of our economy.

Investment growth is still very tardy compared to the need of the country, about which the survey says that it is recovering since last year. The story of growth in fixed investment is not also at the level of pushing growth at the sustained level of 8 per cent though it has picked up from 8.3 per cent in 2016-17 to 9.3 per cent next year and further to 10.0 per cent in 2018-19. Fiscal deficit of the Central Government has also declined from 3.5 percent of GDP in 2017-18 to 3.4 percent in 2018-19, however, it is too small to arrest its adverse impact on the Indian Economy. Against all odds, the survey hopes that there are prospects of pickup in growth in 2019-20 on the back of further increase in private investment and acceleration in consumption.

On the fiscal position the survey states that FY 2018-19 ended with fiscal deficit at 3.4 per cent of GDP and debt to GDP ratio of 44.5 per cent (Provisional). It is undoubtedly too high. As per cent of GDP, total Central Government expenditure fell by only by 0.3 percentage points in 2018-19 PA over 2017-18. There is 0.4 percentage point reduction in revenue expenditure and 0.1 percentage point increase in capital expenditure, which are minor to have desired impact. States’ own tax and non-tax revenue displays robust growth in 2017-18 RE and envisaged to be maintained in 2018-19 BE. On the basis of this the survey predicts that the revised fiscal glide path envisages achieving fiscal deficit of 3 per cent of GDP by FY 2020-21 and Central Government debt to 40 per cent of GDP by 2024-25.