Indian economy to grow at 7 per cent range in FY20: CEA

The Indian economy will grow at 7 per cent range in the current fiscal, powered by the effects of the strong structural reforms such as bankruptcy laws, Goods and Services Tax (GST), crackdown on shell companies and the fiscal prudence undertaken in the last five years, Chief Economic Advisor (CEA) Krishnamurthy V Subramanian said on Monday.

As an effect of these measures, the current economic slowdown will gradually be replaced by higher investment and consumption going ahead, Subramanian told IANS in an interview.

“We maintain our projection of a 7 per cent growth rate going forward. Given the reforms that have already been undertaken the effects will start showing after a lag. India will be able to maintain the ‘fastest growing economy’ tag ahead of China. We still have significant potential and scope to grow strongly given the reforms that have been undertaken,” Subramanian said.

The Asian Development Bank (ADB), the Reserve Bank of India (RBI) and the International Monetary Fund (IMF) have cut India’s GDP growth forecast to 7.3 per cent for 2019-20.

The Indian economy grew at 6.6 per cent in the December quarter, the slowest in five quarters, which prompted the government’s Central Statistics Office (CSO) to trim its 2018-19 forecast to 7 per cent from 7.2 per cent estimated the previous month.

The CEA responded to the current economic slowdown where he said the effect of investments would manifest on economic growth with a lag and in an election year, there is wait-and- watch mode by corporates before undertaking fresh fund infusion into businesses.

He said the economy had built-up excess capacity and the utilsation was below 80 per cent leading to an investment slowdown.

“It is well recognised that the investment cycle had slowed down because of the dual balancesheet problem. Not only that, a number of corporate have significantly over-leveraged positions. The average capacity utilisation is still below 80 per cent because of the build-up of excess capacity. So, there is a slowdown in the investment cycle. Also during elections, people are in a wait and watch mode and that process will resolve itself”, the chief advisor pointed out.

According to Subramanian, the last five years have seen many key structural reforms which will start showing the results after a lag with particular reference to IBC (Insolvency and Bankruptcy Code, 2016).

“There were some very important structural reforms that have happened. One is the Bankruptcy Code because of which the quality of investments being undertaken is changing. Earlier when the threat of bankruptcy was not there, firms could undertake capital budgeting without worrying too much about project failure. But now it has changed and they have to be a lot more careful about the quality of investments too. The effect of structural changes of IBC will start showing with some lag”, he said.

“Enactment of the bankruptcy code, clean-up of close to 3.5 lakh shell companies, implementation of GST creating an opportunity for a pan-India markets, and the direct benefits transfer which brings money to those at the bottom of the pyramid, are all key structural reforms that will show results. The results would be visible with a lag, so there is nothing to worry”, the chief advisor said.

Asked about the time period for this lag, the CEA said: “Typically the effect of investments on growth happens over varying cycles that could sometimes take even two years. The investment cycle had been coming down because both on demand and supply side, there are concerns due to the dual balacesheet problems and it is only now that the investments have started to pick upt. So the effects will start showing up with some lag”.

The CEA will present his first Economic Survey in July this year. “The PMI (Purchasing Managers’ Index) was 54.3 points in February which signals optimism. So, the combined structural reforms - IBC, lower inflation, macro stability both on fiscal prudence and on external sector, we are poised for good growth and investors should look forward to that.” India’s economy grew at 8.2 per cent in the first quarter of 2018-19 on the back of a strong core performance and a healthy base. In the Q2, the growth dropped to 7.1 per cent and it further slid to 6.6 per cent in Q3.

The Q4 and full year GDP growth are awaited from CSO. The persisting slowdown and now the index of IIP showing contraction first time in the last 21 months and Q3 GDP growth moderating to 6.6 per cent which again is slowest in the last five quarters.

The Department of Economic Affairs’s monthly report too dwelt on the slowdown. “India’s economy appears to have slowed down slightly in 2018-19”, said the monthly report for March.

Indo-Asian News Service