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Six takeaways from the Indian government’s own economic report card

By Madhura Karnik & Manu Balachandran

Here’s the verdict on India’s economy: Growth seems to be on track, but the fiscal math looks tricky.

“At a time when the newest normal for the world economy is one of turbulence and volatility, India is a refuge of stability and an outpost of opportunity. Its macroeconomy is robust, and it is likely to be the fastest growing major economy in the world in 2016,” India’s finance ministry said in its annual Economic Survey (pdf) released today (Feb. 26).

The survey provides an overview of the country’s economic health and growth prospects ahead of the annual budget, which finance minister Arun Jaitley will present in parliament on Feb. 29.

The economy will grow between 7% and 7.5% in the 2016-17 fiscal, the survey estimated, which means India will hold its place as the world’s fastest-growing major economy. Over a longer horizon, India’s growth prospects continue to be robust.

However, there are serious concerns over the country’s fiscal deficit—the excess of government’s expenses over revenues. The target of 3.9% for the current fiscal (2015-16) is fairly achievable, but the survey says the next year is expected to be “a challenging one from the fiscal point of view.”

“The chances of India’s growth rate in 2016-17 increasing significantly beyond 2015-16 levels are not very high, due to likelihood of persistence of global slowdown. Further, the implementation of the Pay Commission recommendations and the One Rank One Pay (OROP) scheme will put an additional burden on expenditure,” the survey explained.

The government will have to shell out anywhere between Rs18,000 crore and Rs20,000 crore annually for the OROP scheme, while the Seventh Pay Commission proposals will lead to additional expenses of Rs73,000 crore in the first year.

“The survey signals that government may adhere to 3.9% fiscal deficit target for the 2016 fiscal, but I do not share the belief that there is scope to review the medium term fiscal consolidation framework. State fiscal deficits are already poised to widen, and there is no fiscal space,” Abhishek Upadhyay, an economist at ICIC Securities, told Reuters.

Here are six takeaways from the survey:

GDP growth

In January 2015, the Central Statistical Office (CSO) changed the way it computes the GDP. As a result, India’s annual GDP expansion suddenly jumped from 4.7% to 6.9% for the 2014 fiscal.

Subsequently, these numbers have come under scrutiny, since the on-ground situation suggests a less prosperous environment, with manufacturing lagging and exports falling. Nevertheless, going by government estimates, India’s economic growth is much higher than many global peers.

Fiscal deficit

Last year, presenting his second budget, Jaitley had set himself an ambitious target of bringing down India’s fiscal deficit from 4.1% of the GDP in fiscal 2015 to 3.9% by 2016.

The economic survey suggests that India is on course to meeting this target. “This assessment is based on patterns of revenue and expenditure in the first nine months of the current financial year, in spite of the challenges posed by a lower-than-projected nominal GDP growth,” it said.

That should bring some relief for Jaitley, who has faced flak for being unable to convincingly turn around the economy in the last 20 months. Much of the improvement in fiscal deficit has do with the government’s increased revenue, thanks to better “indirect tax collection, higher level of capital expenditure on the plan side, lower level of subsidies and enhanced untied resources transferred to the states following the acceptance of recommendations of the 14th Finance Commission.”

But beyond this, the situation looks tricky.

Subsidies

While the dramatic fall in global oil prices has helped the government trim its subsidy bill, the survey also pointed to leakages in the system. Currently, the government’s subsidy bill amounts to about 4.2% of the GDP. But this could shrink to lower than 2%, mainly because of a reduction in petroleum subsidy.

The survey also had some harsh words for the Modi administration’s inability to stop leakages in the subsidy system, and therefore, benefit even more from the fall in commodity prices.

“The Rs1 lakh crore of subsidy going to the better-off merely on account of 6 commodities plus the small savings schemes represent a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving,” the survey said.

Inflation

Benign global commodity prices are helping India check inflation.

The consumer price index (CPI) inflation is now at 4.9%—well under the government’s and the Reserve Bank of India’s (RBI) target of bringing it down to 5% by March 2017. The survey expects the RBI to meet this target, which was set in March 2015.

This may well mean that RBI governor Raghuram Rajan could consider cutting key interest rates, lowering the cost of capital and infusing more liquidity in the banking system.

Exports

Meanwhile, there is unlikely to be a revival in exports, which fell for a fourteenth straight month in February, anytime soon.  This isn’t good news for prime minister Narendra Modi’s goal of reaching $900 billion in exports by 2020.

“In the current year, the rupee values of exports and imports (of goods and non-factor services) are both projected to decline; the former on account of the sluggish global demand and the latter due to steep decline in international crude oil prices and other commodity prices,” the survey said.

Agriculture

India’s rural economy is facing its own set of challenges, including lacklustre monsoons. The sector is expected to grow at 1.1% in fiscal 2016, after a contraction of 0.2% in 2015, the survey estimated.

“The farm sector has experienced two years of low growth on account of two consecutive years of deficient south-west monsoon (June-September) rainfall, the only fourth such occurrence during the last 115 years,” the survey said.

But weather-related factors such as the El Nino—the warming of the Pacific Ocean that leads to lower rainfall in Asian countries—could make things worse. According to the survey, “the 2015 El Nino has been the strongest since 1997, depressing production over the past year.”

Read all our stories on Budget 2016 here.