Economic Survey 2015: Reforms need to keep pace, says Rohini Malkani of Citibank

By Rohini Malkani of Citibank

The Economic Survey suggests that India is currently in a sweet spot (strong political mandate for reform coupled with benign external environment) which could "propel" it onto a double-digit growth trajectory. This will help the economy meet its fundamental objective of "wiping every tear from every eye" and creating opportunities for all. The double-digit growth does appear ambitious.

However, in addition to ongoing reforms, the government has launched wide-ranging Socioeconomic programmes: Jan Dhan (financial inclusion), Swachh Bharat (Clean India), Make in India (manufacturing), and Digital India (access). Combined, we believe they should boost GDP by 1-2%, reduce the current account deficit by 50-75 bps, bolster savings rate by 1-2%, reduce fisc by 0.5-0.75% and could be nation changers. While remaining optimistic on growth, the survey acknowledges that the challenges of creating opportunity and reducing vulnerability continue. It notes that due to a decline in employment elasticity, job generation (1.5%) has not kept pace with labour force growth (2.2-2.3%).

It also highlights that while India's macro vulnerability has reduced dramatically over the last two years, it is still higher than the mean of its peer countries in the BBB rating category. Hence, the survey recommends continued reforms by the government to ramp up investment, rationalise subsidies, create a competitive, predictable and clean tax policy environment and accelerate disinvestment. The survey pegs GDP at 8.1-8.5%, current account deficit at less than 1% of GDP, continued fiscal consolidation and inflation at 5-5.5%, thereby opening up the space for further monetary easing.

These numbers are largely in line with Citi estimates. Looking at the specifics, the Survey expects growth to accelerate by 0.6-1.1% to 8.1-8.5% in FY16 (7.4% in FY15). It expects inflation to undershoot RBI's target by 0.5-1%, thus opening up space for monetary easing. It highlights that inflation has become structurally lower due to decline in oil prices, decelerating food/ agri prices and slowing rural wage growth. The outlook on the current account remains favourable due to moderation in crude prices and lower gold imports.

Lastly on the fisc, the survey states that the government will have to adhere to its 4.1% fiscal deficit target for FY15 and meet its medium-term deficit target of 3% of GDP. Going forward, cash transfers based on/leveraging the 'JAM trinity' (Jan Dhan, Aadhaar, Mobile) would help efficiently allocate, through subsidies, government expenditure of (similar to) 4% of GDP.