Mixing caution & optimism: Eco Survey 2018’s crucial findings, projections


Cautious, optimistic, or both? Either way, the Economic Survey 2018 has been described as “a must-read for all seeking to improve their understanding of the Indian economy”. Pegging GDP growth for FY19 at 7-7.5 per cent, the survey also flagged various hurdles the economy and its sectors would face, including the threat from rising oil prices and climate change.

For the “first time in India’s history”, as stated by the survey, state-wise data on international exports was dwelt upon in the document. The data indicate a strong correlation between export performance and the standard of living in states. Further, Chief Economic Advisor Arvind Subramanian said in the Economic Survey, presented in Parliament on Monday, that the government cannot rule out a pause in its fiscal consolidation plan in the coming financial year.

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Other issues, such as the health of Indian markets, the impact of oil prices on growth, climate change, and the impact of the Goods and Services Tax (GST) and other reforms, etc, were also discussed in the survey.

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Here are the key details the survey presented:

1) Optimistic about growth

Writing for the Business Standard, Mihir S Sharma says that Subramanian struck an optimistic note about economic growth going forward. The survey said that in the second half of the financial year, there were “robust signs of growth”. It predicted that growth for the full 2017-18 financial year would be higher than the Central Statistics Office’s prediction of 6.5 per cent at 6.75 per cent year on year. Further, it projected that growth in FY19 would be between 7-7.5 per cent, having received a boost from the fading of the disruption caused by demonetisation, a recovery in global demand, and select domestic policy actions. If the survey is accurate, India will reclaim the tag of the fastest-growing large economy in the world.

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However, Sharma writes that the survey has gone with an optimistic view of growth, based on certain aspects of its analysis of the ongoing financial year. The survey noted the “higher than expected” fiscal deficits, current account deficit, and inflation in 2017-18. It added that the manufacturing sector continued to struggle, with the ratio of factory exports to GDP and the manufacturing trade balance declining. The survey also noted that the agriculture sector has not witnessed an increase in real value added for the past four years.

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2) Don’t get overly ambitious with fiscal deficit targets

Setting ambitious fiscal consolidation targets that might not be realised would be bad for the government’s economic credibility, the survey said. For the current financial year (FY18), Subramanian did not rule out a Union fiscal deficit wider than the targeted 3.2 per cent of GDP.

Ahead of Budget 2018, the survey said that ambitious fiscal consolidation targets for the coming pre-election year should be avoided. It also termed as unfounded the market’s concerns over linking Rs 500 billion of additional market borrowings to a proportionate widening of the fiscal deficit for FY18, stating that the mop-up could go hand-in-hand with lower withdrawals from the National Small Savings Fund (NSSF).

“Setting overly ambitious targets for consolidation — especially in a pre-election year — based on optimistic forecasts that carry a high risk of not being realised will not garner credibility,” CEA Subramanian said in the Economic Survey.

3) Climate change could choke up farm income

Farm incomes could fall by 20-25 per cent due to climate change, the survey said.

The survey laid down medium-term risks to the country’s agriculture sector from climate change, stating that there could be a 20-25 per cent decline in farm incomes in un-irrigated areas. However, it did not dwell much on immediate concerns like falling prices of farm produce and dwindling incomes.

According to the survey, climate change’s adverse impacts could cause more than a Rs 3,600 per year drop in income for the median farm household, at current levels of farm income.

To minimise the impact of climate change, the survey calls on the government to extend drip and sprinkler irrigation in a big way, replace targeted subsidies in power and fertilisers with cash transfers, and have a re-look at its cereals-centric policy. Regarding farm wages and prices, the survey says that the trend of acceleration in agriculture and non-agriculture rural wages seems to have decelerated beginning just before 2017-18’s kharif season; however, it continues to be greater than much of the past three years.

4) Correction in markets not impossible

Sounding a note of caution on the high equity valuations, the survey didn’t rule out the possibility of a correction. “Sustaining these valuations will require future growth in the economy and earnings in line with current expectations, and require the portfolio re-allocation to be semi-permanent. Otherwise, the possibility of a correction in them cannot be ruled out,” the survey said.

The benchmark Sensex is trading at 27 times its trailing 12-month earnings after a sharp 23 per cent rally in FY18. The broader-market BSE Midcap and Smallcap indices, which have outperformed the benchmark in FY18, are trading at even higher valuations of 47 and 105 times, respectively.

“Expectations of earnings growth are much higher in India. Indeed, it was such expectations that lie at the origin of the stock market boom. In early 2016-17, signs emerged that the long slide in the corporate profits-to-GDP ratio might finally be coming to an end. Investors reacted to this news with alacrity, bidding up share prices in anticipation of a recovery they hoped lay just ahead. Accordingly, the ratio of prices-to-current earnings rose sharply,” said the report.

Speaking to Business Standard, Gautam Duggad, head of research at Motilal Oswal Institutional Equities, explains that largely on account of earnings revival expectations, “there is exuberance in broader market valuations”; however, “if earnings disappoint or if there is a drop in incremental flows”, a “sharp correction” could be seen.

5) The importance of exports

Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana account for a whopping 70 per cent of the country’s exports, the survey revealed, stating that for the “first time in India’s history”, data on the international exports of states has been dwelt upon in the document.

The data indicated a strong correlation between states’ export performance and the standard of living enjoyed by their residents.

“States that export internationally and trade with other states were found to be richer. Such correlation is stronger between prosperity and international trade,” the survey said.

Further, of the four principal drivers of growth, exports may well turn out to be the main driver of growth in FY19, said the survey.

“The prospects for India’s external sector in this and coming year look bright with world trade projected to grow at 4.2 per cent and four per cent in 2017 and 2018, respectively, from 2.4 per cent in 2016; trade of major partner countries improving and above all India’s export growth also picking up,” it said.

It added, however, that the downside risks lie in the rise in oil prices. However, the survey said that this could also lead to higher inflow of remittances, which have started picking up.

6) Oil prices could trip up the economy

According to Subramanian, crude oil prices would be among the biggest challenges going ahead.

“Whether or not consumption bounces back depends on oil prices going forward,” the CEA said on Monday, adding, “There are factors which we need to be very watchful about. The first is global crude oil prices. We know the rule of thumb: with every $10 increase in the price of oil, GDP growth comes down by 0.2-0.3 per cent.”

How big is the risk? While talking about the policy agenda — which includes “supporting agriculture, stabilising GST, completing twin balance sheet actions with further reforms, and privatising Air India” — for the year ahead, the CEA listed “heading off any probable pressure from oil prices”.

As the prices of Brent crude oil, a benchmark for India, consolidate around $70 a barrel, a debate has started over whether it is heading towards $80.

As on January 19, Brent prices had risen 3.6 per cent in 2018 and were quoting at $69.3. They went up by 14 per cent in 2017.

7) Rs 10.9 trillion GST revenue in FY18?

The indirect tax base saw a 50 per cent surge since GST was rolled out, the survey said, adding that this was caused by a large increase in registrations, especially by small enterprises. Further, according to survey, demonetisation of high-value currency notes resulted in a widening of the taxpayers’ base.

As of December 2017, there were 9.8 million unique GST registrants, slightly more than indirect tax registrants under the earlier system. Although not comparable, GST has increased the number of unique indirect taxpayers by more than 50 per cent, a substantial 3.4 million.

Annual GST collection for 2017-18, based on the five-month average till November, was Rs 10.5 trillion, which is 8.2 per cent higher than indirect tax collections last year of Centre and states combined, said the Survey.

The survey highlighted that there was a potential of 12 per cent growth in GST revenue in the current fiscal year to Rs 10.9 trillion.

8) Formal jobs far greater than current official estimates

In a surprising finding, the survey said that the formal jobs in the economy were far more than what official estimates showed. The survey estimated that formal sector jobs could range between 31 per cent and 54 per cent of the workforce in the non-agricultural sectors. Social security and tax coverage were the two parameters used by the survey.

“These estimates for formal non-farm payroll, ranging from 31 per cent in the case of social security-defined formality and 53 per cent in the case of tax-defined formality, are considerably greater than current beliefs about the size of formal sector non-farm payroll,” the survey said.business-standard