The Indian growth poser
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The trust deficit as far as India’s growth numbers are concerned is high. Ambit Capital, among many others, has been arguing about the accuracy of the country’s new gross domestic product (GDP) series. Commenting on the December quarter numbers, the brokerage believes the official numbers understate the extent of the slowdown that the Indian economy is currently undergoing.
In fact, the India Keqiang Index (pronounced “kuh cheeang”), which comprises “real” economy indicators such as auto sales, cargo volume handled, capital goods’ imports and power demand, shows that the economy has been losing momentum for a while now. Using the Keqiang Index, Ambit’s GDP growth estimate says that growth for the December quarter would be 5.4% from a year ago. That is in stark contrast to the 7.3% growth printed by the new GDP series.
Chart 1 shows the performance for both the series in the last four quarters. The December quarter growth shows a marked slowdown, compared with the previous three quarters.
A pertinent question then is, will growth get sabotaged if the government sticks to its fiscal consolidation path by lowering the fiscal deficit target to 3.5% of FY17 in the national budget?
“Our fiscal impulse framework, including growth multipliers that capture the growth gains of switching from current to capital spending, suggests that lowering the deficit to 3.5% in FY17 does not necessarily imply a drag on growth, provided the government plans prudently,” wrote economists from HSBC Global Research in a report.
HSBC economists elaborate further—“By that we mean undertaking fiscal reforms such as subsidy rationalization that create savings to finance mounting expenses such as higher government wages; jacking up stake sales (which are not as taxing on growth as higher taxes); and increasing capex gently to reap the benefits of high multipliers.”
But many expect slippages. “We expect the government to meet its fiscal deficit target of 3.9% of GDP in FY16, but expect slippage to 3.7% of GDP in FY17,” said Nomura Research in its budget preview.
Kotak Securities, too, expects the finance minister to target a fiscal deficit of 3.7% of GDP.
Despite the virtues of sticking to the pre-announced fiscal consolidation path, it seems likely that the government will raise expenditure to meet mounting pressures, without making commensurate fiscal savings, says HSBC, adding that the fiscal deficit for FY17 is likely to be wider, at around 3.8% of GDP.
In any case, incremental spending at 0.3% or so of GDP by itself might not be a large enough stimulus, as this column has pointed out earlier.
According to Ambit, the PM’s three resets—centered around making physical savings less lucrative, a crackdown on the black economy, and an overhaul of the subsidy mechanism—are likely to adversely impact GDP growth in the short term.“In specific, we expect GDP growth to be recorded at 6.8% y-o-y (year-on-year) in FY16 (vs 7.2% y-o-y in FY15),” says Ambit.
The trouble is, if the finance minister makes his budget calculations based on the Central Statistics Office’s estimate of 7.6% GDP growth this fiscal, he will have a very different set of numbers than if he takes ground realities into account.