Economic
Highlights
New Delhi, 10
February 2020
Economic Survey
FUND CRUNCH IN PVT SECTOR
By Shivaji Sarkar
India, now the fifth
largest economy and aiming to become the third, is growing at 5 per cent in 2019-20,
says the Economic Survey. The RBI has estimated it at 4.8 per cent and the IMF
and other international organisations agree with it. This is lower than the
2018-19 figures of 6.8 per cent but the survey is hopeful of a better pace.
The nominal GDP is
estimated at Rs 204.4 lakh crore ($2.9 trillion) in 2019-20 with a growth of
7.5 per cent over the provisional estimates of at Rs 190.1 lakh crore ($ 2.7
trillion) in 2018-19. However, it finds gross value addition deceleration at
basic prices reduced to 4.9 per cent against 6.6 per cent in 2018-19 across all
sectors, public administration and defence.
The most positive
aspect is the rise in NIFTY India Consumption Index for the first time this
year with a growth of 10.1 per cent in October 2019. It decelerates in November
2019 to 5.7 per cent and in December to 0.19 per cent. Though this indicates
hardship, the survey does not lose its hope.
Two other aspects of
its optimism are upbeat BSE sensex that rises by 7 per cent till Dec 31 and
confidence of foreign investors in India. The FDI has increased to $4.4 billion
till November against $21.2 billion in April-November 2018. The foreign
portfolio investment had risen to $12.6 billion though outflow also rose to
$8.7 billion.
Forex reserves rising
to $461.2 billion till January 10, 2020 from $413 billion in March 2019 is
reflective of the confidence of overseas investors. Possibly it indicates that
make in India is an investment puller. It also finds it better that “assemble
in India” that was the norm four decades earlier. It sees a positive in food
inflation since April 2019 and possibly even 7.35 consumer index rise in
December. It says, “The terms of trade for farmers is improving and will lead
to increase in rural demand”.
The other positives
in its view are gross GST collection surpassing Rs 1 lakh crore, “pointing to
an increased economic activity”. Though it admits that the recent growth
deceleration is a drag, it says the virtuous cycle of higher fixed
investment-higher GDP growth-higher consumption growth generated economic
development.
It rightly points out
that “post-incentivisation” of the corporate from 2008-09 to 2011-12, during
the UPA regime, fixed investment rate started declining sharply since 2011-12.
It plateaued in 2016-17 but deceleration continues. This is linked to excessive
bank lending driven by irrational exuberance of “boom period” to decline in
corporate investments. Between 2011 and 2015, it finds the dependent variable
regressing and found credit expansion between 2008-12 negatively affecting
investment between 2013 and 2017.
It has linked the
slowdown to this credit growth/boom of the banks. Credit growth significantly
fell in 2014-19 compared to 2009-14.
Consequently,
household investments declined in dwelling, other buildings and structures
since 2011-12. It continues and the survey says that it is a reflection of
slower growth in purchase of houses. It led to real estate crisis and build-up
of unsold inventory over the years.
Another problem has
been that “housing prices remained elevated even though growth in prices
(secondary market) has fallen since 2015-16 and remains muted since then”.
The survey says that
the crisis is of a grave nature. As at end of December 2018, about 9.43 lakh
units worth Rs 7.77 lakh crore inventory are stuck in various stages of the
project cycle across top eight cities.
The total unsold
stock is valued at around Rs 1 to 1.5 lakh crore but with 200 per cent rise in
index value it is supposed to be worth at Rs 7.77 lakh crore. Does the survey
indicate another bust around the corner?
Private consumption,
the survey says, also started declining in 2017 and continues till 2019. It
also sees a drop in savings in physical assets. Income not saved in physical
assets by households is either saved in gold or silver – a result of falling
interest rates in deposits or is consumed. Savings declined at national level
and the budget still disincentivises it. The survey says, “A non-rising gross
domestic savings rate may further deteriorate the rupee and make the virtuous
cycle more difficult to realise”.
The survey points out
to a murky point of overall the households spending more on consumption since
2011-12. It may be explained through factors of prices rising and falling of
income as well – either way the households are in distress and do not have
disposable income to boost the market, an essential for growth. This has led the
IMF and World Bank in January 2020 to project India’s real GDP to grow at 5.8
per cent in 2020-21.
India is faced with
many downside risks. It begins with continued global trade tensions delaying
recovery. The recent corona virus scare has also hit global economy. Exports
are unlike to pick up much. Despite some thaw in the US-Iran tensions, survey
economists fear swelling of fiscal deficit – beyond the budgetary projection of
3.5 per cent. It also hints out at increase in capital cost weakening inducement
to invest.
While it does not
discourage increase in interest rates on deposits it finds that quantitative
easing may fuel inflation. If short-term interest rates are raised it fears a
capital flight and rupee coming under pressure. Private consumption can hit
investments further.
Another risk it sees
in the conventional monetary policy. It has run a full course. This means a new
monetary policy has to evolve. But there is a flipside too. Investment in the
public sector post budgetary announcement and as per National Infrastructure
Pipeline proposal of Rs 102 lakh crore has to increase. This may increase
fiscal deficit – simply means government borrowings would rise.
This is likely to
“crowd out private investment” because the financial institutions having funded
the government efforts would not have much surplus. So they are likely to seek
external funding. The survey says that if this happens, the current account
deficit would increase and it can depreciate the rupee.
The government’s
thrust on housing and clearance of inventory, FDI, Make in India, positive
impact of RBI policies and improvement in ease of doing business are to
increase the optimistic outlook. If this prevails, the survey expects strong
rebound in 2020-21. It would belie the IMF, World Bank forecasts and higher
real GDP growth.---INFA
(Copyright, India
News & Feature Alliance)
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