The Economic Survey 2014-15 paints a bring picture for the Indian economy in the coming years, forecasting double digit growth, falling inflation expectations and improved macro economic framework. One factor, however, could move bond markets negatively is the survey’s call for a bit of flexibility on fiscal deficit, which could increase government borrowing.
The Economic Survey is tabled in Parliament one day before the Union Budget. Economic Survey for 2014-15 was tabled in parliament today, one day before the Union Budget 2015-16 that is to be presented to the parliament by the Finance Minister on the 28th of February.
This year’s Economic Survey has two parts, one giving the outlook for the economy for fiscal year 2015-16 and one analysing the performance of the economy for fiscal year 2014-15.
India’s economy has performed well in 2014-15 with GDP growth at 7.4% up from 6.9% seen in 2012-13 (revised numbers with change in base year from 2004-05 to 2011-12). The survey does question the sharp discrepancy in GDP growth numbers for fiscal 2013-14 with growth at 5.1% as per old base year and 6.9% as per new base year. However, given that the base year stands revised, the survey estimates growth for 2015-16 at levels of 8.1% to 8.5% from 2014-15 levels of 7.4%.
CPI inflation has trended down from 8.4% to 5% while core CPI (non food, non fuel) has trended down from 8.1% to 5.7%. CPI is estimated at 5% to 5.5% for 2015-16. GDP deflator is estimated at levels of 2.8% to 3.5%.
On the external front, Current Account deficit (CAD) is estimated at below 1% of GDP for 2015-16 against 1.3% of GDP for 2014-15. The survey raises concern on India’s export competitiveness give export growth at low single digit levels for 2014-15 and even questions RBI’s stance of intervention to buy USD to boost fx reserves.
Fiscal deficit is placed at 4.1% of GDP for 2014-15. However, the survey suggests adopting a medium term target for fiscal deficit at 3% of GDP. The government has embraced a FRBM (Fiscal Responsibility and Budget Management) Act target of fiscal deficit of 3.6% of GDP in 2015-16 and 3% of GDP in 2016-17. The survey suggests wiping out revenue deficit from current levels of 2.9% of GDP and fiscal deficit should only be incurred for capital outlays.
The survey’s has raised a few challenges to adopt a fiscal deficit target of 3.6% for 2015-16. The Fourteenth Finance Commission’s recommendation of higher devolution of taxes to states, government compensating states to the tune of Rs 250 billion as Central Sales Tax (CST) back log and need for increased public investment to revive private investment and growth.
The survey believes RBI will ease policy rates given falling inflation expectations and improved fiscal and current account deficit ratios. RBI would have problem of plenty with surging capital flows. The survey also talks about taking up fx reserves to levels of USD 750 billion to USD 1 trillion from current levels of USD 340 billion by generating current account surplus.
The survey calls for reduction of banks SLR from current levels of 21.5% of NDTL even if it means pressure on bond yields in the short term. The survey believes that once this period of high bond maturities (over 20% of overall government bonds mature in the next five years) are over, the pressure for banks to finance government borrowing will fall leading to normalization in demand and supply of government bonds.