The GDP forecast of 5% for FY20 was largely expected as the CSO bases these numbers on extrapolations of data available till date. Hence with the knowledge of GDP growth being 5.5 and 4.5% in the first two quarters of the year and some high frequency data on IIP growth and core sector growth being known for October and November, all forecasts were in the range of 4.8-5.2%. Therefore there was no element of surprise.
This number is however significant as it does show that besides agriculture, where the growth rate is almost the same as last year and the government sector (public administration), all other segments are to register lower growth this year. Therefore, even while some experts do talk of observing the ever elusive green shoots, they will not be spread over a wide canvas and would be localised. The indication hence is that there is a generalized slowdown and despite myriads of policy reforms brought in by the government since August, the impact has been limited. One will evidently have to be patient for all these reforms to work out.
With the Budget around the corner the focus will be directed here since it will set the tone for the next fiscal. Monetary policy so far has been very accommodative to the extent that it may have lost its sting given that the 135 bps cut in repo rate has delivered neither the required transmission to lending rates nor has it shown an uptick in investment. And here, the national income data shows a decline in gross fixed capital formation rate from 29.3% to 28.1% this year, which more or less settles the issue on investment. This is not surprising because the problem in India has been on the demand side and the response has been on the supply side, either through repo rate cuts or easing of various impediments in various sectors such as auto, real estate, SMEs which will help in the medium run, but cannot turn around the economy significantly.
Probably the only two direct measures taken on the demand side by the government last year was the PM-Kisan scheme which allocated Rs 75,000 crore as cash payments to farmers and the corporate tax rate cut. The impact has not yet been observed, if at all. In case of the cash transfer, assuming that it has gone as per schedule the amount per family at Rs 500/month is too small to really bring about the big ticket consumption. The amount has been spread over a large population of 125 mn families and given that food inflation has been rising quite prodigiously has meant that this additional income could have gotten spent on necessities.
As far as the corporate tax cut is concerned, while the Q2 results indicate that most companies have made use of this new rate and foregone other exemptions, the money saved has not yet been deployed for investment. This can be because when there is limited demand and surplus capacity, there is less need to invest. Some companies may have preferred to repay debt and this is possible as deleveraging has been a trend in the last few years. Or they may also use these savings to pay higher dividend to shareholders at a time when profitability conditions are also weak.
In this situation, the Budget assumes importance as it has the potential to provide a direct push to the economy by either lowering income tax (which is the only one that can feature given that corporate tax rates have been cut and the commodity tax rates are within the purview of the GST Council) or increasing expenditure significantly. While this may sound straightforward it should be remembered that the government has to pay obeisance to the FRBM norms and hence the fiscal deficit number that is chosen will be important as all other calculations would follow from here.
The fiscal ratios get affected by the GDP numbers and hence the 5% growth forecast for FY20 gets embedded in the revised fiscal deficit ratio of the government and moves up by at least 0.15% other things being equal. Also if growth is 5% for FY20, the projected growth number for FY21 would have to be benchmarked with this forecast. Practically speaking, it cannot be more than 6% (or nominal growth of 10% as against 11.5% budgeted and revised to 7.5% last year) and would get linked with future tax revenue collections in FY21. Therefore, the government has to take a call on the comfort level of the fiscal deficit ratio which is acceptable as the present FRBM rules talk of 3% being the ideal number with a suitable glide path.
Hence everything will hinge on whether the government would deviate significantly from this path and work on a stimulus package or continue on the road of prudence and let the process move in the ordinary course. This will be revealed on 1st February.
The writer is chief economist, CARE Ratings.
Views are personal.