Inflationary headwinds have prompted India Ratings to lower the growth projection for the current fiscal (2018-19) to 7.2 per cent. At the same time, the rating and research agency apprehends that populism on account of forthcoming election might upset the fiscal maths in the States.

The agency in its report, released on Thursday, has listed many reasons for the headwinds. These include elevated global crude oil prices, Government’s decision to fix the minimum support price of all kharif crops at 1.5 times of the production cost, rising trade protectionism, depreciating rupee and no visible signs of the abatement of the non-performing assets of the banking sector.

Keeping these in mind, the agency has lowered its growth projection by 20 bps (100 bps means 1 per cent) from the earlier projection of 7.4 per cent. In fact, IMF has also cut its projection to 7.3 per cent from 7.4 per cent, while RBI has maintained the estimate at 7.4 per cent.

Mixed news on expenditures

There are mixed news on expenditures – consumption and investment. While private final consumption expenditure is expected to grow at 7.6 per cent in the current fiscal compared with 6.6 per cent in last fiscal, investment expenditure as measured by gross fixed capital formation is expected to grow at 8 per cent in the current fiscal.

The agency also believes that capital expenditure (capex) by the Government alone will be insufficient to revive the capex cycle, as its share in the total capex of the economy was only 11.1 per cent during the last six fiscal years.

Retail, wholesale inflation

Talking about inflation, the agency said that despite a likely normal rainfall this year, retail inflation could go up to 4.6 per cent from the earlier projection of 4.3 per cent. Producers’ or Wholesale Price Index (WPI) is likely to go much higher with the latest estimate at 4.1 per cent from the previous estimate of 3.4 per cent.

The agency mentioned that pass-through of global crude oil prices, increase in the minimum support price of kharif crops and house rent allowance revision by the state governments will fuel the inflation. Good news is that despite rise in projected inflation, India Ratings does not see further rate hike during the current fiscal after two successive rate hikes of 25 bps each in June and August.

There should not be any problem in meeting the fiscal deficit according to the budgeted target of 3.3 per cent during this fiscal. However, the same cannot be said about current account deficit as it is likely to touch $71.1 billion (2.6 per cent of GDP) from $48.7 billion last fiscal (1.9 per cent of GDP) due to the widening trade gap.

States’ fiscal maths

In another report released on Thursday itself, the agency said that “populism could portend fiscal improvement in deficit ratio.’’ It expects the aggregate fiscal deficit of the States to moderate to 2.8 per cent of GDP, which is 30 bps lower than the previous estimate but 20 bps higher than the budgeted aggregate fiscal deficit/GDP of the States at 2.6 per cent for FY19.

Revenue expenditure incurred by the States could exceed the budgeted level in FY19 in view of a higher spending undertaken by the State Governments in the form of farm loan waiver, subsidy and spending on welfare schemes as the elections approaches. The likely improvement in deficit ratios, therefore, is vulnerable to populist measures in the run-up to state and general elections.

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