In February, the Finance Ministry’s Economic Survey had predicted India’s real GDP growth for 2017-18 to be within a range of 6.75 per cent to 7.5 per cent. But now, a “Volume 2” version of the Survey tabled in Parliament on Friday has practically ruled out the possibility of meeting the upper end of the growth forecast, while stating that “the balance of risks seem to have shifted to the downside”. This not-so-bullish prognosis has been attributed to “new factors” that “impart a deflationary bias to (economic) activity”. These new factors that have apparently arisen after February 2017 include farm loan waivers by states (which may force them to slash capital expenditures to keep budget deficits on track), transitional challenges from implementing the goods and services tax (GST), the rupee’s appreciation in real terms (which could hit exports), worsening financials of power and telecom firms (which would impact bank balance sheets as well), and agrarian stress (from declining price realisations in most non-cereal crops).
If GDP growth does turn out to be below 7 per cent, as the Survey fears, it would mark a second successive year of decline from 8 per cent in 2015-16 and 7.1 per cent in 2016-17. The implications will not just be economic, but also political. Growth is important, simply because there can be no jobs and incomes without it. If growth, investment and job creation show no visible signs of pick-up well before the next general elections — hardly 20 months away — it could present problems even for the Narendra Modi government whose party in currently on a roll. The Survey has, in fact, even raised doubts over the average 7.5 per cent growth figure for the last two years, by noting that it came on the back of a mere 4.5 per cent annual increase in gross fixed capital formation, two per cent rise in export volumes and two percentage points decline in the credit-to-GDP ratio. According to the Survey, no other country in the world has managed to achieve two years of seven per cent average GDP growth on the basis of such weak investment, export and credit offtake performance. Even assuming the GDP numbers to be right, there is no doubt that even this growth is unsustainable. Growth ultimately has to also pass the smell test — which can only happen when people “see” factories, offices and jobs getting created.
The Modi government should take the Survey’s assessment of the economy — an official document couldn’t have been more candid — as a timely warning signal. The last three years have seen significant reforms, whether in GST, digitalisation, tax compliance, direct benefit transfer, inflation targeting or bankruptcy resolution. These will no doubt yield fruits in the medium and long term. But ensuring growth in the immediate term is no less important.