Centre slashes GDP forecast for FY16 to 7 to 7.5%

Cites outgo due to Pay Panel, weak economic signals

The government on Friday slashed India’s full year economic growth forecast by a good one percentage point and said the future growth outlook too looked challenging due to the 7th Pay Commission outgo and certain economic indicators which sent weak signals.

In its ‘Mid-Year Economic Analysis’ tabled in Parliament on Friday, the government pared its 2015-16 economic growth forecast to 7–7.5 per cent from the earlier 8.5 per cent, and said inflation is expected to be at 6 per cent in the fiscal. It, however, kept intact the fiscal deficit target of 3.9 per cent.

Deccan Herald had reported in its edition dated December 3, 2015, that the government is “expected to pare India’s economic growth forecast for the current fiscal to 7.5 per cent, against the Budget forecast of up to 8.5 per cent” and that “this may be announced in the Mid-Year Economic Review for 2015-16”.

 At a press conference on Friday, Chief Economic Advisor Arvind Subramanian, the report’s author, said: “The economy is recovering, but it is hard to be very definitive about the strength and breadth of the recovery for two reasons — the economy is sending mixed signals, and second there is some uncertainty on how to interpret GDP data.”

He added, “The outlook, going forward is little bit challenging….Private sector investment remains a challenge because of legacy issues. Investment recovery will remain weak. Corporate sector is indebted, and agriculture is not contributing as much.”

Direct taxes not buoyant

What are the mixed signals? Subramanian posed the query and himself answered that while collection of indirect taxes is very high, direct taxes were not very buoyant. Personal consumer loans were growing rapidly, but loans to industry were growing slowly, he said.

Coming to sectors, he said that while coal, steel, aluminium, etc. were not showing much growth, electricity generation and car sales are rising. Subramanian also said the implementation of the 7th Pay Commission recommendations and one-rank-one-pension (OROP) too will put pressure on government finances.

“The proposed wage hike for government workers may impact plans for the next fiscal,” the review said.

“The fiscal deficit target of 3.9 per cent this year will be steadfastly met...3.5 per cent next year looks more challenging,” the CEA said. Fiscal deficit is the difference between government’s total expenditure and its revenues.

“The economy has made considerable progress, but challenges remain,” he said. In his view, the passage of the Goods and Services Tax (GST), and the Bankruptcy Code, besides steps to boost agriculture, will be the key to further economic acceleration.

Incidentally, there is political deadlock in Parliament on the GST, and the bill does not find any mention in the list of business for the remaining three days before both the Houses adjourn sine die. The government has also not listed the bankruptcy code bill for passage in this session.

The mid-year analysis also put the onus of growth on the government as private investment was lacklustre, given the low demand conditions, which in turn has led to surplus capacity in several sectors.

Slide in growth

The Mid-Year Economic Analysis’ expects inflation to be at 6%
Chief Economic Advisor Arvind Subramanian, who authored the report, said  the economy is sending mixed signals
 Private sector investment remains a challenge because of legacy issues