Mid Year Review

Government reconciles to 7-7.5% GDP growth

After presenting a highly optimistic picture of the Indian economy, the Mid-Year economic review is more subdued and more pragmatic. The review has cut the GDP growth for fiscal 2016 to 7-7.5%, which is closer to what the RBI has always been saying. There are three key elements to the mid-year review…

Growth revised downwards…

 The claims of Arvind Subramanian that India will grow at 8% always sounded fairly optimistic. Economic Affairs Secretary, Shaktikanta Das, has been a lot more forthright and pragmatic in his assessment. According to Das, the GDP growth is likely to settle in the range of 7-7.5%. This downsizing of GDP growth was necessitated by a variety of reasons. Firstly, there was the global slowdown which took its toll on demand. Secondly, the failure of monsoons and the drought conditions in various parts also played its part in slowing down growth. Lastly, the weak rural and urban demand in India has also been responsible for the revised growth estimates. But, it needs to be remembered that even at this rate, India is the fastest growing large economy in the world.

Fiscal deficit target to be met…

The good news in the mid-year review is that the government is confident of meeting its 3.9% fiscal deficit target for the year. While the government will fall short on disinvestment revenues, it will make up through non-tax revenues. Also, the option to increase duties on petrol and diesel is always there. The bigger concern is on the implementation of the Seventh Pay Commission recommendations, which will kick in from the next fiscal. While the fiscal deficit target for this year may be met, the question is what happens next year since the Pay Commission payout will add another 0.5% to the fiscal deficit.

Matching the revenues…

The big challenge for the government will be managing its revenues. The disinvestment program was scheduled to raise Rs.69,500 crore. While there has been a feeble attempt at selling minority stakes, the restructuring of loss making PSUs is yet to begin. On the tax collections front, the government has already fallen short on the direct taxes front for the first 8 months of the fiscal. Assuming that direct taxes could be back-ended, there will still be a shortfall on this front.

Indirect tax is one area where the government has enjoyed substantial buoyancy. That is probably going to be helped by some additional levies between now and the Union Budget. But the review admits that the government will be counting heavily on non-tax revenues to compensate for the disinvestment shortfall. How it will be done, is the billion dollar question!  ©

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