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MPC's lowered growth estimate may be a tall hill to climb as well

Arup Roychoudhury/New Delhi 06 Oct 17 | 02:53 AM

As Prime Minister Narendra Modi on Wednesday afternoon hit back at his critics over the government’s steering of the economy, he also admitted that there was work to be done to enable higher economic growth.

Earlier on the same day, the Reserve Bank of India’s (RBI's) Monetary Policy Committee cut its gross value added (GVA) forecast for 2017-18 to 6.7 per cent from 7.3 per cent.

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But even getting to that target will be a tough ask for Modi’s administration, economists say, especially because the data so far does not quite capture the informal sector. There are two factors at play here: Whether the Centre can gather the resources to boost growth, and where those resources need to be deployed.

The MPC’s forecast is based on the RBI’s latest Monetary Policy Report, which predicts real GVA growth at 6.4 per cent in July-September, 7.1 per cent in October-December, and 7.7 per cent in January-March, as against GVA growth of 5.6 per cent in the April-June quarter.

Former Chief Statistician Pronab Sen said that the 7.7 per cent forecast for Q4 seemed steep. 

“If you strip away the base effect, it will be closer to 6.5 per cent," he said. “If (gross domestic product, or GDP) growth is 5.7 per cent (for April-June), and you believe that the system has bottomed out, then you don’t have to do much," he said.

“However, if your view is that the 5.7 per cent growth represents only the organised sector, and if the problem lies with the unorganised small businesses, which have not been fully captured in the first-quarter data, then you need to address a lot of structural issues to avoid a further downward spiral," Sen said.

GDP growth for the April-June quarter fell to 5.7 per cent due to demonetisation and destocking by companies following pre-goods and services tax (GST) jitters. Growth was 7.9 per cent in April-June 2016-17.

“The RBI’s growth projections for the third and fourth quarters of FY18 may prove optimistic unless exports show a stronger performance," said DK Srivastava, chief policy advisor, EY India. 

Last week, the Centre nudged state-owned companies to spend an additional Rs 25,000 crore as capital expenditure this fiscal year, above the budgeted combined capital spending target of Rs 3.85 lakh crore for the Centre and public sector undertakings. The state-owned banks may also be recapitalised further through bond issuances or selling the Centre’s stakes in these lenders. These are non-fiscal stimuli as the Centre’s own fiscal position remains unchanged for now.

However, a fiscal stimulus is not ruled out. In an unusual move, Economic Affairs Secretary Subhash Garg had said that the government’s borrowing programme would be re-assessed in December.

The gross borrowing target for 2017-18 is Rs 5.80 lakh crore, while the fiscal deficit target is 3.2 per cent of GDP.

“The government’s capacity to provide fiscal stimulus is constrained as it has reached 96 per cent of the annual deficit target by August and there is a strong likelihood of tax revenues showing lower than budgeted growth. The central government would find it difficult to meet the fiscal deficit target of 3.2 per cent (of GDP) even without spending more than what is budgeted," Srivastava said.

“Private investment would not become buoyant unless capacity utilisation crosses at least the 75 per cent mark. In the second half, even government investment growth would be low as it has front-loaded these expenditures in the first half," he added.

At a time when there will be a revenue shortfall of Rs 13,000 crore this fiscal year due to the excise duty cut in petrol and diesel, and there is lack of clarity on whether there will be a deficit in indirect tax collection compared to budget estimates, the Centre may have to rely more on non-tax revenue, especially disinvestment and dividends from state-owned companies and financial institutions.

The PSU dividend target in 2017-18 is Rs 67,529 crore, down from the 2016-17 revised estimate of Rs 77,051 crore. The finance ministry is asking the RBI for a higher dividend. 

The budgeted disinvestment target for the year stands at Rs 72,500 crore, the highest ever for any year. Senior officials told Business Standard while minority stake sales were in the pipeline, the market conditions would have to be carefully watched. “It will be in no way an easy task," an official conceded.

Disinvestment proceeds have consistently fallen short of Budget Estimates. However, the Centre is counting on privatising Air India, and Oil and Natural Gas Corporation’s acquisition of Hindustan Petroleum, to be completed within this fiscal year.

There is then the issue of where the Centre needs to spend. “If adequate resources do become available, the sectors to focus on are manufacturing and trade, hotels, transport, storage and communications, followed by construction as these have suffered the most in terms of erosion of growth from Q4 FY16, the quarter in which the previous peak GVA growth was achieved," said Srivastava.

According to Sen, where the Centre spends depends on how it reads the GDP data available so far. If the April-June data is taken at face value, the Centre can spend on big-ticket infrastructure projects.

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