FinMin's 8% GDP growth rate unsustainable, says UBS

In a reality check of Finance Minister Arun Jaitley's ambitions for 8% economic target, one of the world's largest wealth manager, UBS says it is unsustainable.

According to a research by the global wealth advisor, in case the government pursues with its 8% growth target it will lead to further rise in inflation, fiscal slippages and current account deficit.

"Considering the fiscal constraints and sluggish investment cycle, boosting India's economic growth beyond 8% without improving potential growth over the next two to three years will entail a widening of macro stability risks (inflation, current account deficit, and fiscal deficit) and is unsustainable," Basel-headquartered UBS stated in a report on Wednesday.

However, the advisory has upped its targets for India's growth potential to 6.8% to 7.2%, from 6.7% in 2014-15. India ranks high in potential growth among the developing countries -- Brazil (2.2-2.8%), Russia (1.5- 2.0%), Indonesia (5.4-5.8%), and China (5.5-6.0%).

"India's historical experience does suggest that it could return to have potential growth in the 8-8.5% region through a combination of higher fixed capex growth (12% YoY) and total-factor productivity (4.5%)," UBS said.

Jobs creation woes

The report cautions that despite having the best demographic dividend in the world, the job creation is a cause of concern. "Considering the demographic change, the biggest challenge for India is its ability to provide education and health care and create ample employment opportunities for the rising working-age population. Intriguingly, the dependency ratio in India has been rising, not falling, with the labour participation rate and worker-to-population ratio coming down," UBS said.

As per various estimates, of the incremental 1.3 crore influx in India's working age population every year, 70 lakh workers enter the labour force, though less than half find a job. Over 45% of the workforce now is employed in agriculture, sector plagued with disguised unemployment.

"Many of those currently considered 'employed' may therefore also be in need of more productive jobs. Assuming the government remains on the reform path, we assume underemployment continues, but declines (base case)," the report said.