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Following the Reserve Bank of India’s revision of India’s GDP growth for FY20 downwards to 6.1 per cent last week, the IMF has also revised India’s growth in 2019 to similar levels, while maintaining that growth in 2020 could be better, at 7 per cent. Macro data releases continue to point towards stress in both domestic and external conditions. But it is uncertain if the Centre is factoring in the revised growth outlook in its fiscal calculations.
The IMF has pointed out that the US-China trade tensions will cumulatively reduce global GDP by 0.8 per cent by 2020. The impact is already visible in the trade numbers, with merchandise exports for September declining 6.57 per cent, compared to the corresponding month the previous year. There is concern that exports growth will contract further in the coming months due to falling commodity prices, which is a fallout of slowing global demand and growth. Stress in the domestic economy is continuing in the September quarter as well. According to Bank of America Merrill Lynch, India activity index recorded growth of 3.3 per cent in August 2019, down from 7.8 per cent in the previous month. This index has been dragged by the deceleration in real credit growth, domestic traffic, industrial production, auto sales, capex and construction activity. Construction activity de-grew 4.2 per cent in August 2019, compared to the same month the previous year, while capex declined 15 per cent.
While the Centre has been rolling out a series of stimulus measures aimed at stemming the slow-down, it is silent on the fall-out of this deceleration on Budgeted numbers for FY20. The tax revenue projections are linked to the growth in nominal GDP, and clearly these need to be revised lower given the projected trajectory for rest of the year. Also the Centre needs to take cognizance of the impact of the corporate tax cut on the projected revenue collections.
Choosing to ignore the impact of the revised outlook on fiscal numbers might cost the Centre dear. If the actual situation is acknowledged and revenue expenditure is curtailed accordingly, the situation can be salvaged somewhat.
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