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Drought, slowdown cut growth forecast to 7-7.5%

In its mid-year review, the government, however, reaffirmed its commitment to stick to its budgeted fiscal deficit target of 3.9 per cent of GDP for the current fiscal.

By: ENS Economic Bureau | New Delhi | December 19, 2015 5:22:47 am
Drought, GDP growth, fiscal 2016-17 GDP, Reserve Bank of India, economic growth, legacy issues,  nation news, india news The downward revision in the growth projections comes in the wake of the economic growth slowing to 7.2 per cent the first half of the current fiscal.

The Centre pruned its gross domestic product (GDP) growth forecast for this fiscal by a percentage point to 7-7.5 per cent on Friday, citing sustained weakness in corporate spending and global demand, and risks to farm output due to two successive droughts.

The growth projection for fiscal 2016-17 is grim as well, with the additional boost to consumption this year prompted by the decline in oil prices likely to recede by next year, the finance ministry said in its mid-year economic review.

Compounding the worries for next year is the fiscal outlook, which is expected to be “challenging” in light of the impact of the Seventh Pay Commission recommendations. A significant improvement in GDP growth, the report noted, was unlikely till pending tax and financial sector reforms were carried out.

According to the review, the economy is now expected to grow at 7-7.5 per cent in the fiscal year ending March 2016, down from an estimate of 8.1-8.5 per cent announced in the Budget in February. This brings the Centre’s growth estimate in line with the projections by the Reserve Bank of India, which in September had marked down the growth projection for 2015-16 to 7.4 per cent with a downward bias.

In its mid-year review, the government, however, reaffirmed its commitment to stick to its budgeted fiscal deficit target of 3.9 per cent of GDP for the current fiscal.

“The economy is recovering, but it’s hard to be very definitive about the strength and breadth of the recovery for two reasons — the economy is sending mixed signal and second, there is some uncertainty how to interpret GDP data,” Chief Economic Advisor Arvind Subramanian said.

The downward revision in the growth projections comes in the wake of the economic growth slowing to 7.2 per cent the first half of the current fiscal.

Subramanian said that “the outlook, going forward is little bit challenging… Private sector investment remains challenge because of legacy issues. Investment recovery will remain weak. Corporate sector is indebted and agriculture is not contributing as much”.

The report noted that the improvement in growth has been uneven, powered only by private consumption and public investment. “To move India rapidly to its medium-term growth trajectory, supply side reforms and demand management will be essential,” it said.

The projections come at a time when growth in profits at the country’s top companies, during the quarter ending September, was the slowest in two-and-a-half years. Declining profit growth has proved to be a continuing drag on corporate spending, with the mid-year review offering no hope for a quick turnaround in corporate balance sheets, which it expects to “recover slowly”.

In the interim, the prescription includes a further increase in public spending on roads, bridges and railways, as well as a recalibration of fiscal and monetary targets to help kick-start demand.

Finance Minister Arun Jaitley, in his last budget, has committed to pruning the fiscal deficit to 3.9 per cent of the GDP in the current fiscal and 3.5 per cent in 2016-17. While the government is slated to meet this year’s target, the report said the Pay Commission commitments next year could make it tougher to stick to the committed fiscal consolidation roadmap. “Both fiscal and monetary policy stances will need to be carefully re-assessed,” the ministry said in the review.

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