India forecasts economy rebound after hitting five-year low

Mumbai, India –  India’s finance ministry predicts the economy will grow at seven percent next year, surpassing the 6.8 percent recorded for financial year 2018-2019 – a five-year low. 

The optimistic forecast states that India will remain the fastest growing economy in the world. This is partly attributed to declining global oil prices, an uptick in investment and political stability that will “push the animal spirits of the economy”.

This is according to the annual Economic Survey, released on Thursday by Chief Economic Adviser Krishnamurthy Subramanian. The report on the state of India’s economy is a prelude to tomorrow’s budget, which will be presented by Nirmala Sitharaman, India’s first female finance minister,

India’s statistical output has been questioned in recent months, after Arvind Subramanian, a former chief economic adviser, wrote in a Harvard paper that the country’s GDP figures were overstated by 2.5 percentage points between 2011-2012 and 2016-2017.

Analysts are therefore wary of today’s growth estimates amid strong economic headwinds such as weak exports and a stressed banking sector curtailing demand.

“As far as I am aware neither private investment nor consumption are doing particularly well right now and, given the high rates of unemployment, there is a disconnect here that does not justify higher than observed growth,” Amit Basole, associate professor of economics at Azim Premji University, told Al Jazeera.

Taking stock of the country’s economic performance over the past year, the survey noted several downside risks to growth, including expensive agricultural schemes designed to boost farmer incomes, and low levels of tax collection, both of which could pose “fiscal challenges”.

Shifting gears

Despite a tightening economic landscape, the newly re-elected government aims to turn India into a $5 trillion economy by 2025 – a goal that will require eight percent growth per year, the survey said.

Subramanian has looked towards East Asian economies for confirmation that increased private investment must be the “key driver” to create a “virtuous cycle” of “savings, exports, growth and jobs”.

However, the pursuit of high growth comes amid foreign direct investment equity inflows at their lowest levels in six years and a global economic slowdown compounded by a US-China trade war.

Economists also point to a less-than-rosy investment picture at home that will stymie India’s transition to an investment-led economy, as banks remain burdened with a high rate of non-performing assets and a liquidity crisis afflicting the country’s non-bank financial companies (NBFCs).

One of the “biggest hurdles to #Economy5trillion“, however, is poor enforcement of contracts and dispute resolution, Subramanian tweeted after visiting parliament.

By filling vacant positions in the lower judiciary, the survey estimates the 35 million-strong backlog of cases impeding the delivery of justice could be cleared within five years.

We should consider subsidising wages or topping them up. This is something that has worked for the garment industry

by Amit Basole, Azim Premji University

Inclusive growth

With India’s unemployment rate at a 45-year high, the survey suggests “nourishing” micro small & medium enterprises (MSMEs) by lifting restrictive labour regulations and reducing the cost of capital as a way to create jobs.

“The government has tried to tackle access to credit through the Mudra loan programme, but the amounts were so small I’m not sure it led to job creation,” said Basole. “We should consider subsidising wages or topping them up. This is something that has worked for the garment industry.”

The survey also suggested implementing a National Floor Minimum Wage to improve income stability, increase investment in health and social care for an ageing population, as well as measures to raise per capita energy consumption to improve quality of life and aid “inclusive growth”.

Analysts, however, warn that any such new or existing schemes should not damage the country’s financial stability amid mounting macro-economic pressures.

“For the Mahatma Gandhi National Rural Employment Generation Scheme for example, allocations have been increasing but we are still unable to keep pace with growing expenditures and the liabilities are mounting,” Avani Kapur, director at Accountability Initiative, part of the Centre for Policy Research, a research think-tank, told Al Jazeera.

All eyes now turn to tomorrow’s budget, as Finance Minister Sitharaman aims to set out a spending plan that can boost growth, follow-through on social objectives and balance the books.