The new chief economic adviser Krishnamurthy Subramanian’s maiden Economic Survey is an economic document which broadly ticks all the right boxes and puts forward a study on how Prime Minister Narendra Modi’s vision of making India a $5 trillion economy by 2024-25 can take shape. But the new CEA’s Survey, tabled in Parliament by finance minister Nirmala Sitharaman a day before the Union Budget, is also peppered with a good degree of optimism on the state of the economy and projects the GDP growth rate at 7% for FY20.

The Survey is particularly significant, coming at a time when the economy has been seen to be slowing down, with GDP growth at 6.8% in FY19 and 5.8% in the last quarter of that fiscal. But if one goes by the CEA’s document, the coming fiscal and beyond is likely to witness a revival. This moderation in growth momentum is mainly on account of lower growth in ‘Agriculture & allied’, ‘Trade, hotel, transport, storage, communication and services related to broadcasting’ and ‘Public administration & defence’ sectors, the Survey notes.

Subramanian’s optimism is based on a few key observations. “Growth in investment, which had slowed down for many years, has bottomed out and has started to recover since 2017-18. Growth in fixed investment picked up from 8.3% in 2016-17 to 9.3% in 2017-18 and further to 10% in 2018-19,” the Survey observes. Moreover, while pointing out that the performance of the consumption sector will be crucial in deciding the growth path of economy, the Survey also says that rural wages growth, which was declining, “seems to have bottomed out and has started to increase since mid-2018.”

“ Further growth in rural wages should help spur rural demand. Pick up in food prices should help in increasing rural incomes and spending capacity and hence rural consumption demand. PM-Kisan scheme was announced by the government to provide an income support of ₹6000 per year to small and marginal farmer families having combined land holding/ownership of up to 2 hectares. The condition of minimum land holding has been subsequently removed to benefit all farmers. This cash transfer scheme will also increase the rural incomes,” the Economic Survey says, justifying its assumption of a pick-up in consumption going forward.

Another factor which the Survey sees in aiding the assumption of a recovery in the growth rate is the possibility of easing of oil prices. Oil prices increased in 2018-19 by around 14 $/bbl. However, oil prices are expected to decline in 2019-20 from the current level (based on the oil futures price for 2019-20). This should provide a positive push to consumption, the Survey notes. While macroeconomic conditions are seen to be stable, and structural reforms initiated over the past few years are continuing on course. The investment rate will pick up further in 2019-20, after declining from 2011-12 and thereafter having bottomed out, the Survey notes. This is on the back of higher credit growth and improved demand.

The political stability in the country should push the animal spirits of the economy, while the higher capacity utilization and uptick in business expectations should increase investment activity in 2019-20.   
Economic Survey, 2018-19

There’s further optimism in the Survey. It says the accommodative monetary policy adopted by the central bank in the beginning of the year should help in lowering real lending rates, particularly if the transmission mechanism improves. “There are signs of continuing resolution of stressed assets in the banking sector as reflected in decline in NPA to gross advances ratio as on December 2018, which should push the capex cycle.”

But the consumption sector appears to be a bit of a continuing worry. The Survey concedes there are downside risks to the consumption story, which will depend heavily on the recovery in the farm sector and farm prices which typically would aid consumption. That, in turn, would be dependent on the monsoon. “The meteorological department has predicted that the rainfall over the country as a whole is likely to be near normal this year. This should lead to improvement in agriculture sector growth. However, according to IMD, some regions are expected to receive less than normal rains. This could prove to be detrimental for crop production in certain affected areas,” the Economic Survey states.

There’s another factor which could derail the recovery. If the crisis in the non-banking finance companies (NBFC) sector spills over to this year, that could impact credit offtake from NBFCs and thereby dampen the growth in consumption spending, the Survey concedes. The global slowdown, and the increased trade tensions between the U.S. and China could also impact exports and demand for goods from India, impacting overall growth, it says.

But the overall thrust of the Survey’s economic outlook is positive. It points out that while growth of GDP moderated to 6.8% in 2018-19 from 7.2% in 2017-18, India was still the fastest growing major economy. It points out that India maintained its macroeconomic stability by containing inflation within 4% and by maintaining a manageable current account deficit to GDP ratio. Non-Performing Assets as percentage of Gross Advances reduced to 10.1 per cent at end December 2018 from 11.5 per cent at end March 2018.

On a broader ideas level, the Survey attempts to put forward what it calls a “strategic blueprint” for investment-led growth. Investment, it says, is the key driver to catalyse the economy into a “self-sustaining virtuous cycle” when supported by a favourable demographic base. There’s talk of nourishing dwarfs to become giants (freeing up and supporting micro, small and medium enterprises), data as a public good, legal reforms, and use of technology in welfare schemes, among other things. The Survey also mentions the need to redesign the minimum wage system targeting the vulnerable lower rung of wage earners to drive up demand and strengthen the middle class.

As a policy document for a government which has just got into its second term with an astonishingly powerful mandate, the Survey is strong on theoretical content. The assumptions it makes on growth will be tested in the coming months. The proof of the pudding, as always, will be in the eating.

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