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Is all not well with the Indian economy?

The last fortnight saw two very important economic indicators being announced — the Mid-Year Review and the Reserve Bank’s Financial Stability Report. And while on the face of it, everything seems fine, these reports send confusing signals on whether the Indian economy can truly grow at 7-7.5 percent.

While the Mid-Year Review points towards lower inflation, robust external balances and better managed public finances as positives, it also flagged concerns about the economic condition. Additionally, weak corporate sector and investment scene also pose a threat to economic recovery, the report said.

Further, the Mid-Year Review strongly advocated the need for monetary and fiscal stimulus, with the Chief Economic Advisor (CEA) Arvind Subramanian raising a very ‘controversial’ point — should Finance Minister Arun Jaitley stick to his 3.5 percent (2016-17) fiscal deficit target when nominal GDP growth is weak? The Mid-Year Review proposes to maintain fiscal deficit at 3.9 percent, rather than lower it to 3.5 percent.

But according to the government, India is one of the fastest-growing major economies. Hence, the question: Why the need to deviate from the targeted fiscal deficit roadmap? Does a nation growing at 7-7.5 percent merit a fiscal stimulus?

According to a Mint report , the only scenario in which a fiscal stimulus is warranted is if the Indian economy is not growing at 7-7.5 percent. “… if we are not really the fastest growing big economy, if growth is actually much less than the official data shows and if the economy is really in dire straits. But the government needs to say that upfront,” the Mint report states.

In a Business Standard column, TN Ninan says , post the Mid-Year Review, economists have warned of a slowdown in the economy. “Their growth forecasts for next year (2016-17) ranged between 5-6 percent, using different assumptions and analytical points — from the state of the world economy to the limitations of the government’s track record and capability, from broad institutional constraints on the system to the state of the banking and corporate sectors, and veering also into the technical area of how GDP numbers are put together and how they could be impacted by changes in the different price indices,” Ninan says.

Soon after the Mid-Year Review, the Reserve Bank in its Financial Stability Report pointed to banks’ stressed assets as a big worry — especially in light of the fact that large borrowers’ contribution to bad loans rose to 87 percent. RBI further pointed to risks arising from erratic climatic conditions, corporate performance, limited policy space and low investment growth.

The BS report in fact says the economy may be worse off at the end of 2015 than at the start. “It is worth recalling the government’s upbeat assessment in its Economic Survey last February. The economy, it said with a flourish, had ‘reached a sweet spot — rare in the history of nations — in which it could finally be launched on a double-digit medium-term growth trajectory’… Now, nearly a year later, the data on company debt shows the picture deteriorating in terms of some key ratios, not getting better. The RBI has said that the government-owned banks’ health has deteriorated too.”


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