Mid-term eco review: Government to be the key driver of economy in FY17

Today in India there is a plethora of data available with relatively high frequency. Therefore, economic numbers per se are always available and while there could be some revisions, the direction is quite clear. Therefore there can be no surprises in a review report. In such a scenario, does the MOF’s mid-term review add any value considering that there are several official views coming from RBI and multilateral agencies besides private houses? The MOF’s review is required because it actually provides perspectives on the data which is there in front of us and provides some insights into the future. As it comes from the government one can take it as an official interpretation of how things stand. The main takeaway is that there are mixed signals right now in the economy leaning on then positive, and that the government will play a pivotal role in moving things. [caption id=“attachment_2527980” align=“alignleft” width=“380”]  Reuters[/caption] To begin with the government has pared the GDP growth forecast to between 7-7.5 per cent from above 8 per cent earlier. While this is a sharp comedown, it looks pragmatic as there is still uncertainty with regards to how sectors will continue to perform in the next 4 months. Statistical base effects have created distortions in industrial growth numbers which in turn have made them volatile. Add to this the uncertainty in agricultural output, and there is a modicum of haziness in the data. Second, the government has lowered the nominal GDP growth rate to 8.2 per cent which is significant as it is lower than the double digit growth assumed at the time of the budget. While nominal GDP growth rate does not really matter as it is just a number which includes inflation impact, the fact that we have had disinflation indicates that nominal growth is low – just 0.7 to 1.2 per cent more than real GDP. It becomes significant as most of our goals in terms of fiscal deficit ratio and current account deficit are earmarked with nominal GDP. A lower growth rate reduces room in these areas, which will skew the ratios. Third, the Report is cognizant of the fiscal pressures this year and while it hopes to meet the 3.9 per cent number, there will be pressures from two sides. First numerically the denominator will be smaller. Second, the disinvestment target is too stiff. There has been a lot of solace from higher tax collections which is surprising considering that imports have witnessed negative growth and manufacturing is not growing at the trend rates. Hence growth in customs and excise duties is hard to reconcile with these numbers. But the government seems confident of meeting this target due to the continuance of buoyancy in tax revenue. Fourth, on the positive side, the Ministry assures us that the quality of expenditure has improved and there will definitely be no compromise on capex. The first part means that both the Centre and States are spending the money on capital goods which is good. The second means that the revenue targets are going to be met and hence there will be no slippage in the form of cuts in capex. As we have not yet seen a rise in investment so far, it may be assumed that the next two quarters will witness high rates of capital formation this year. The industries linked with such spending like steel, cement, engineering etc. could look forward to better times. Fifth on inflation the government is pragmatic and agrees with the RBI target of 6 per cent for the year. With food inflation being the main reason or inflation, there is admission of such conditions continuing for the rest of the year. But one can deduce that the RBI will be less under pressure to lower rates as the agreement with the MOF was to target inflation and once this number of 6 per cent is what is prevailing in the economy, a neutral stance on rates would not be questioned. Sixth, the report does put the onus of bringing about growth on the government as private investment is lackluster given the low demand conditions which in turn has led to surplus capacity in several sectors. The only way out is for the government to crowd in investment, which earlier used to be scorned at. This again is a positive indication given by the government. Seventh, for FY17, the report is cautious on whether we can actually talk of walking on the fiscal path of lowering the fiscal deficit ratio by 0.4 per cent of GDP. There may be need to review this goal. This is indicative that we may take a longer time to move towards the 3 per cent mark which is the ultimate target for the government. Eight, the government is gung-ho on exports picking up next year which may not find acquiescence from all given that global conditions while being better may not be too buoyant to justify such optimism. But one can deduce that the government will continue to focus on export promotion notwithstanding these developments. Last, the government has praised the role of m consumption in bringing about growth in the economy and feels that the Pay Commission recommendations will have a mixed impact. While it will help consumption, there could be pressure on the budget which has to accommodate 0.65 per cent of GDP additionally to accommodate this expense. On the whole it is a balanced view of the economy which rightly highlights how the government will be the driver of the economy even in FY17 until the private sector is able to takeover. This will mean a higher infra push in the coming years, which is good news for the related sectors.