At 7.7 per cent, the GDP growth number for January-March quarter of FY18 beats all expectations but the economy still faces headwinds. BusinessLine caught up with Sunil Sinha, Principal Economist and Director Public Finance, India Ratings, to discuss the scenario and the way ahead for the economy. Excerpts:

How do you see the Q4 GDP numbers? Is there a pleasant surprise?

The GDP growth at 7.7 per cent for the Q4 of FY18 is certainly higher than India Ratings’ expectations. However, putting it in perspective reveals that this has happened against the backdrop of a downward revision of GDP in the earlier three quarters of FY18 leaving the overall GDP growth for FY18 at 6.7 per cent. Yet, the growth pattern, if assessed on a quarter to quarter basis, shows that growth momentum in the economy is building up. This is a good sign and if nurtured carefully, growth can accelerate further in FY19.

Does this show that the effects of the demonetisation have completely faded?

Demonetisation had two impacts — direct and indirect. The direct impact was felt in terms of cash shortage to conduct the routine commercial and business transactions. With cash in the system back to the same level prior to demonetisation, the direct impact has more or less faded. However, the disruption caused by the demonetisation to the informal and MSME sectors have not faded away completely. More so, where the enterprises had either shut down or reduced their scale of operations due to demonetisation and have not got their workforce back.

Does this mean that GST has settled down? Are we moving towards more formalisation?

Although operational problems associated with GST implementation have not yet settled fully, many teething problems faced immediately after the rollout have fallen in place. This is an going process and will eventually get ironed out. For example, the special drive undertaken by the Central Board of Indirect Taxes and Customs from May 31, 2018 to June 14, 2018 to settle the refund claims under GST is a step in this direction. Currently refund claims to the tune of ₹14,000 crore (₹7,000 crore on the IGST side and ₹7,000 crore on account of ITC) are pending with the Government. The architecture of GST is such that it does not allow input tax credit unless the documentation, both at the point of purchase and sale, is done. There is no doubt that this will expand formalisation in the economy.

There is a belief that GST will add at least 1.5 per cent to GDP? How much can that be accounted for in FY18 (or 19)?

It is difficult to arrive at a number as to how GST will contribute to the GDP in FY19. However, GST is expected to remove a number of tax related anomalies prevalent in the earlier tax structure and in turn help business operate more efficiently and smoothly. However, this will take time as businesses are currently struggling to adjust to the new system. The benefit will be more visible once the transition period is over. A study done by the NCAER for the 13th Finance Commission had estimated that implementation of a comprehensive GST would provide gains to India’s GDP somewhere in the range of 0.9 to 1.7 per cent.

A big question is about jobs. Though the National Income data does not reveal that, what is your assessment based on manufacturing and services data?

Job creation has been a difficult area. On the basis of population dynamics it is estimated that every year about 10-13 million people join the work force but the actual jobs created are way lower. Also, a drop in the employment elasticity of the economy over the years is a concern. However, in the absence of any comprehensive data, it is difficult to comment on the job/ job creation scenario in the manufacturing/services sector. But the hope that focus on manufacturing probably holds the key to India’s employment conundrum may also turn out to be misplaced given the way automation/robotics is gaining traction.

What kind of growth number can we see during FY19?

In the month of January, India Ratings had projected a GDP growth of 7.1 per cent for FY19. However, in our view, since the macro landscape has improved we have revised our GDP forecast for FY19 to 7.4 per cent.

From the production side, higher growth in agriculture (on the expectations of normal rainfall and assumption of even rainfall distribution over space and time) and industrial sectors is expected to push the overall economic growth. From the expenditure side, the boost is expected to come from both private and government expenditure, coupled with green shoots emerging in investment spending. This is not to say that there are no risks. The economy is facing a number of headwinds ranging from the non-performing assets of the banking system and elevated bond yields to increased trade protectionism and tightening global financial conditions. Recently, elevated global oil price and currency depreciation have been added to this list. We believe that if the global oil price remains high and weakness in the rupee continues beyond 2-3 months then this combination can pose an immediate threat to the economy impacting GDP growth. But we believe that global oil prices will correct from the present high. In fact, they have already started to correct since May 25.

What kind of fiscal deficit number we can expect in FY19?

We believe that the fiscal deficit will come in at the budgeted level of 3.2 per cent of GDP in FY19.

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