Eco Survey: It’s all about interpretation: Business Line 1st February 2018

The Survey, for example, is not too concerned about savings flowing out from banks to the capital market

As Frederick Nietzsche said, there are no facts, only interpretations. This would just about be the case when one reads the Economic Survey for FY18. The Survey is a detailed update on all aspects of the economy and does not work with data which is not known. Hence, the so-called facts are available to all but the conclusions drawn change after reading the report. The Survey is evidently sanguine about the future to the extent of being gung-ho provided some glitches are addressed with expediency. As it is an interpretation of facts, it does turn around several views which were held before the report came out. How then is one to look at it?

Successful or struggling?

The Survey has forecast GDP growth for this year to be 6.75 per cent, which is higher than the CSO’s. It further puts a number of 7-7.5 per cent for FY19 and the interpretation by corporate heads is that the economy is almost going to start galloping from next year if the upper mark is achieved. Now, GDP growth in FY16 was 8 per cent which came down to 7.1 per cent in FY17 and could go up to 6.75 per cent in FY18 and say, 7.5 per cent in FY19. Does this mean that we are on the trot or are we still struggling to get back to the 8 per cent number?

Here one would have expected the Survey to devote a chapter on the cost of two major reforms that have been undertaken by the Government which have cleansed the system for sure and made it more efficient, but left a cost-trail which ultimately gets reflected in the lower GDP growth number.

Demonetisation and GST have definitely added transparency to the tax system and resulted in more taxpayers. But the disruption caused to small businesses and agriculture has been significant; else there is no explanation for lower GDP growth in FY17 and FY18 as monsoons have been good, inflation low, crude oil price benign, CAD low, fiscal balances under control, rupee stronger, foreign flows higher and interest rates lower.

Between hope and conviction

As the Survey takes an independent view of economic conditions and has gone ahead to advise the Government to set realistic and credible fiscal targets for FY19 rather than target a low number which cannot be achieved, it may be expected that the next edition will provide a detailed analysis on the cost of reforms. In fact, the Survey has also pointed out that the IBC, though good, has to work its way through time to ensure that it is relevant. The same holds for the tax litigation issues that need to be resolved or else the ‘doing business’ climate would be dented.

One reason for the growth optimism as has been interpreted is the expected pick-up in investment and industrial growth. Here one is not sure if this is a hope or a conviction because the major issue afflicting the economy today is demand, which has not been the focal point of the Survey. The analysis admits that low capacity utilisation is a cause of low investment, but this can be traced to low consumption demand in the last three years. This is a serious issue because if households are not spending, and have been buffeted by the two major reforms, then the clue to higher growth is employment generation and higher income.

The Survey does present a different set of data on employment based on social security data to show that there are more enrolled persons in the non-farm sector which is interesting as this angle has not been explored earlier. Employment data based on corporate annual reports for the formal sector or the labour department surveys do point to low growth in job creation. However, extrapolating this growth in social security enrolments should have led to an upsurge in consumer demand . This has not happened and the expectation is that it would take off next year.

Surprising position

While emphasising the role of investment in stimulating the economy the Survey clears the path by saying that the twin balance sheet issue has to be addressed, which also means we need to see more resolutions coming in the next couple of months. While this is a valid point, there is some analysis to show that higher investment is better than lower savings which is supported by select cross-country examples. This is interesting because at present, our investment and savings rates are both declining.

The Survey expects investment to pick up especially from the private sector (while the NPA issue is tackled) but believes that this mismatch would not be serious for the economy. Anecdotally, a high current account deficit can create a different set of problem when savings trails investment. Here, surprisingly, the Survey is not too concerned about surplus financials savings generated mainly due to demonetisation flowing out from banks to the capital market. This has been taken to be a positive fallout of demonetisation where funds have been directed to the market. A concern everywhere now is that as the market appears to be overvalued and is due for a correction, there could be significant losses for households that have moved to such riskier avenues to earn higher returns relative to deposit rates which are falling.

Now, these returns are linked to interest rates prevailing in the banking system. Here the Survey takes the unconventional route of interpreting inflation on an average basis and arguing that CPI of 3.3 per cent for the first 9 months is lower than the 4 per cent target. One can sense a case being made for a rate cut when the MPC meets after the Budget. This is a novel way of interpreting inflation targeting indeed!