Months ahead of national polls, India’s economic health is under a cloud

Not on fire.
Not on fire.
Image: REUTERS/Rupak De Chowdhuri
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With just a few months left for the 2019 general election, the Narendra Modi government is putting up a brave face on the economy. But economists aren’t impressed.

The government may not be able to keep its promise of reducing India’s fiscal deficit to 3.3% of GDP this financial year, India Ratings and Research said in a Nov. 26 note. The fiscal deficit, the difference between a country’s revenue and expenditure, and a key indicator of macroeconomic health, has stubbornly stayed at 3.5% in the last two fiscals. This is above the government’s comfort level.

The deficit for financial year 2019 is likely to be Rs6.67 lakh crore ($94.13 billion) as against the budgeted Rs6.24 lakh crore due to a shortfall in revenue collections and lower disinvestment proceeds. “The pressure on government finances is mainly arising from the revenue side, particularly from indirect taxes and non-tax revenue,” economists at India Ratings, the local arm of global ratings agency Fitch Ratings, said in the note.

Last month, the global ratings agency Moody’s had also echoed a similar sentiment.

In July 2017, the government rolled out the goods and services tax (GST), replacing multiple state and federal taxes and looking to put in place a simpler indirect tax system. While it may be a step in the right direction, it is yet to help India’s central governement fill its coffers. In the first half of fiscal 2019, aggregate indirect tax collections grew only 4.3% as against the budgeted 22.2%, said the India Ratings note.

A whole host of other factors, too, has derailed the government’s revenue target.

“The shortfall in non-tax revenue is likely to emanate from a) lower dividend/profit pay out by the RBI/nationalised banks/financial institutions, b) lower non-tax revenue receipts from communication services, and c) lower disinvestment receipt,” said the note.

On the other hand, the currency has been under pressure while crude oil prices have been rising, proving to be a double-whammy for the economy.

“Since India is a net oil importer, movement in crude oil prices tends to have an important bearing on its macro stability risks (inflation, current account deficit, and fiscal deficit) and hence economic growth prospects,” said Tanvee Gupta Jain and Gautam Chhaochharia of UBS in a report on Nov. 26.

Given the headwinds, the State Bank of India, the country’s largest lender, expects GDP growth to decline to 7.5-7.6% in the July-September quarter, it said in a note on Monday. GDP growth stood at 8.2% in the first quarter.

The only recent silver linings are softening global crude prices and a strengthening rupee. Crude has corrected nearly 30% from its early-October peak, according to a report from the Swiss multinational investment bank UBS. Meanwhile, the rupee has also appreciated and is now hovering in the range of 70-71 to the dollar. It had breached the 74 level for the first time last month.

Both these factors augur well for the economy, but may still not be enough to help the government on the fiscal front.