When you repeat something often enough, people start believing it. The Centre’s grand target of a $5-trillion economy by 2025, is a perfect example of this phenomenon referred to as the “illusory truth effect.” Following its resounding victory in the Lok Sabha elections, the BJP-led government had set a target of a $5-trillion economy by 2025.
But with GDP growth plummeting to multi-year lows this fiscal — nominal GDP growth in the July-September quarter came in at 6.1 per cent — achieving 12-odd per cent annual growth over the next five years to reach the $5-trillion mark, seems to be a Herculean task. But the Centre has continued to retain its ambitious target in the recently released National Infrastructure Pipeline (NIP) report — which unveiled a ₹102-lakh crore five-year infrastructure development plan.
According to the data given in the report, the Centre has lowered the nominal GDP growth projection for the current FY20 fiscal to 8 per cent (from 11 per cent in the Budget). But it has projected 12.2 per cent annual growth in nominal GDP growth for the next five years. Hence by FY25, the Centre expects the nominal GDP to be ₹365 lakh crore — voila the $5-trillion number!
However, if one were to dig into the anatomy of the ongoing slowdown, it would become evident that the slowdown runs deep and can stretch for a long period. The Centre’s limited fiscal space only accentuates the problem.
In the Budget 2019-20, the Centre had pegged in a nominal GDP growth of 11 per cent for FY20 over FY19 — a tall ask even then. From ₹190 lakh crore in FY19, nominal GDP was projected at ₹211 lakh crore for FY20. Taking cognisance of the sharp slowdown in the first half of this fiscal, the Centre in the NIP report, has lowered its nominal GDP growth estimate for FY20 to ₹205 lakh crore, implying 8 per cent nominal GDP growth this fiscal (the RBI has projected 5 per cent real GDP growth).
A revision in growth projections was on the cards, given the weak growth in GDP in the first half of the fiscal. Nominal GDP growth plummeted to 8 per cent in Q1 (as against 12.6 per cent in the same quarter last fiscal) and further to 6.1 per cent in Q2 (as against 12 per cent last fiscal).
The sharp decline in growth came on the back of industry growth slackening with contraction in manufacturing activity (-1 per cent YoY) and significant decline in growth in mining, construction, electricity and trade.
What is of particular worry is that there has been a sharp contraction in growth in gross fixed capital formation (GFCF). In real terms, growth in GFCF fell to 1 per cent in Q2 from 4 per cent in Q1 (as against 12-13 per cent growth in the first half of last fiscal). While private final consumption growth picked up in Q2, it remains sluggish at nearly half the growth rate witnessed in the first half of FY19.
The silver lining, however, was the sharp growth in government final consumption expenditure, which aided growth. In Q2, government consumption growth shot up to 15.6 per cent from 8.8 per cent in Q1. Central government spending gained momentum (as per CGA figures) in September, and more significantly in October and November. While this is positive, this could limit spending in the second half, impacting growth. As such growth in government expenditure has been not been broad based. While revenue expenditure growth has been led by transfer to States, interest payments, defence pension payouts and fertilizer subsidy, capital expenditure was largely driven by capital outlay on defence services and railways.
With fiscal deficit already at 115 per cent of the budgeted figure (according to CGA data up to November 2019), there is limited scope for further government spending this fiscal.
While the Centre has lowered growth estimate for FY20, taking into these factors, it has remained optimistic about the economic growth over the next five years. The million dollar question is: Can it achieve over 12 per cent annual growth in the ensuing years?
Unrealistic target?
Tracing back, it would appear that 12-odd growth in nominal GDP is not improbable. After all under the UPA II regime (FY09-FY14), nominal GDP grew by about 15 per cent annually (CAGR— compounded annual growth rate). But here’s the chink. The envious growth during the period was marked by high inflation and elevated fiscal deficits.
In the wake of the global financial crisis in 2008, the RBI had adopted an aggressive monetary easing. While there was acceleration in the investment demand in the second half of 2009-10, structural imbalances in many agricultural products and deficient monsoon had a stronger impact on inflation. Inflation in primary commodities moved up from single digit in October 2009 to 18.3 per cent by March 2010. There was also high inflation in both manufactured products and fuel. Fiscal deficit had touched peak levels of 6.2-6.8 per cent between FY09 and FY10 and remained high at 4-5 per cent until FY14.
Such high growth accompanied by high inflation and fiscal deficit is obviously undesirable. If we consider the growth under the NDA government (FY14-FY19) nominal GDP growth averaged about 11 per cent (CAGR) despite demonetisation and GST-related disruptions. CPI inflation fell sharply averaging 4-5 per cent. Fiscal deficit too declined sharply during the period, hovering at 3.5-4 per cent between FY15 and FY18.
While the macros do stand on a better footing, nominal GDP growth scaling up to 12 per cent in the near term will be a tough task, after plummeting to 8 per cent this fiscal. Such growth level was last seen a decade and a half ago.
Significant improvement in government spending is imperative to have a multiplier impact and propel growth. But the Centre’s limited fiscal space is a cause for worry. Remember the Centre’s fiscal consolidation over the past few years has been achieved by compressing expenditure (particularly capital expenditure), which has hurt growth. The Centre will have to bolster revenues —through asset monetisation and strategic sales — rather than crimping on spending to meet the fiscal deficit target.
Aside from reviving investments, the Centre will have to tackle supply-side issues and bring in structural reforms, if it wants to achieve sustainable growth. Pushing forth unrealistic growth targets without such reforms would only add to the woes of a badly beaten down financial system yet to recover from the excessive lending under the UPA regime.
Above all, inflation and Indian rupee still remain the joker in the pack. With inflation on the rise again and rupee in for a rocky ride on the back of rising crude prices and geopolitical tensions, growth in the economy could falter further, pushing the Centre’s $5-trillion dream further into the future.