February 26, 2016 / 7:13 AM / 4 years ago

Expert Views - India sees growth holding up, inflation falling

MUMBAI (Reuters) - India’s economy will grow by between 7.0 percent and 7.75 percent in the 2016/17 fiscal year that starts on April 1, the Economic Survey said on Friday, ahead of the presentation of the annual budget by Finance Minister Arun Jaitley on Monday.

An employee works at the production line of a textile mill on the outskirts of Ahmedabad, India, February 10, 2016. REUTERS/Amit Dave

India should also review its medium-term fiscal strategy, the government report recommended, an indication of the challenge faces to raise pay for government employees and bail out banks without increasing borrowing.



“They have realistically factored in concerns on both external and agriculture fronts.

“The whole uncertainty of the monsoons which has thrown the growth aspirations out of gear for past two consecutive years and the shocks that we are receiving from trade sector on weak global economy have been factored in to project a cautious approach to growth, which is projected at 7.5 percent.

“This is even below the RBI estimate, which is very rare for a government. They have also said fiscal deficit achievement will be challenging for FY17. This shows they are not expecting a promising revenue scenario going forward.

“Yesterday’s rail budget has made full provisions for 7th Pay Commission recommendations. This means government budget will also have to make these provisions. This coupled with lower expected revenue mobilisation does not augur well for the government capex - the major support to investment today, as private investment sentiment continues to stay weak.”


“We disagree with not just with the ‘level’ of the GDP forecast made by the economic survey, but we also disagree with the ‘direction of growth’ that the Survey is implying.

“This is because we expect GDP growth rate to be the same in 2017 versus 2016 and an acceleration is completely ruled-out, given the broken banking system in India and the building stress in the infrastructure sector.

“My sense is that there is a 20-30 basis points slippage coming in the fiscal deficit number, so basically I’m expecting a 3.7 or 3.8 percent fiscal deficit number for 2017.”


“The economic survey has adopted a cautious tone on the economic assumptions, near and medium-term.

“By extension, realism in nominal growth projections bodes well for credibility on budgetary assumptions (primarily deficit, tax buoyancy etc).

“A benign inflation estimate is, however, puzzling ahead of pay commission changes and is perhaps an indication that the housing allowance increase might be staggered/postponed.

“Re-think of the fiscal framework is likely, which suggests the 3 percent target for FY18 is likely to be pushed out. However subsequent comments on need for “credibility and optimally” on FY17 deficit raises the possibility that the -3.5 percent red line might be adhered to on Monday.

“If this pans out, the underlying math will be important to provide confidence to the markets. We would be cautious if the pay commission proposals and bank recap needs are still adopted completely, but no net impact is shown on the headline deficit.”


“Growth assumptions look fine, may be even a tad conservative under the assumption of “normal” monsoons, as does the projection for the CAD (current account deficit) to stay contained.

“The problem in the external accounts continues to be more on the capital account, rather than current account. That is where focus on macro-stability is important.

“The survey signals that government may adhere to 3.9 percent fiscal deficit target for FY16, but I do not share the belief that there is scope to review the medium term fiscal consolidation framework.

“State fiscal deficits are already poised to widen, and there is no fiscal space. A review of the roadmap should also limit scope for monetary accommodation.

“Inflation projections seem optimistic, given the stickiness seen in core inflation, and the impact of pay commission linked wage hikes on CPI, which may continue to seep into the index as states also implement the pay hikes.”

Reporting by Mumbai newsroom; Compiled by Rafael Nam

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