Indian Economy: An Interim Update

Chief Economic AdviserMay 26th, 2015

-5.0

0.0

5.0

10.0

15.0

20.0

Per

cen

t

Rural wage growth

CPI

WPI

Good News: Improving Inflation and Inflation Prospects

Fiscal Indicators of General Government (% of GDP)

2014-15 RE 2015-16 BE

Fiscal Deficit 6.9 6.5

Revenue Deficit 2.9 2.4

Capital Expenditure 4.6 5.1

RE= Revised Estimates; BE= Budget Estimates;

Improving Quality and Quantity of Fiscal Consolidation at General Government Level

Based on analysing 17 State Governments’ Budgets.

Current Account Balance as a per cent of GDP

2004

-05:

Q2

2004

-05:

Q4

2005

-06:

Q2

2005

-06:

Q4

2006

-07:

Q2

2006

-07:

Q4

2007

-08:

Q2

2007

-08:

Q4

2008

-09:

Q2

2008

-09:

Q4

2009

-10:

Q2

2009

-10:

Q4

2010

-11:

Q2

2010

-11:

Q4

2011

-12:

Q2

2011

-12:

Q4

2012

-13:

Q2

2012

-13:

Q4

2013

-14:

Q2

2013

-14:

Q4

2014

-15:

Q2

2015

-16

*

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

Assessing Growth in Short Run

Y = C+ Ipvt+ Ipub + FD’+ (X-M)Where,

Y= Output

C= Consumption

Ipvt= Private Investment

Ipub= Public Investment

FD’= Fiscal Deficit net of Ipub

X-M= Net Exports

Jun/

13Ju

n/13

Jul/1

3Ju

l/13

Aug

/13

Sep/

13Se

p/13

Oct

/13

Nov

/13

Nov

/13

Dec

/13

Jan/

14Ja

n/14

Feb/

14M

ar/1

4M

ar/1

4A

pr/1

4M

ay/1

4M

ay/1

4Ju

n/14

Jul/1

4Ju

l/14

Aug

/14

Sep/

14Se

p/14

Oct

/14

Nov

/14

Nov

/14

Dec

/14

Jan/

15Ja

n/15

Feb/

15M

ar/1

5M

ar/1

5

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Non-oil exports

Non-oil & non-gold imports

Merchandise Trade: Yet to Recover

Jun/

13

Jul/1

3

Aug/1

3

Sep/1

3

Oct/13

Nov/1

3

Dec/1

3

Jan/

14

Feb/1

4

Mar/

14

Apr/1

4

May

/14

Jun/

14

Jul/1

4

Aug/1

4

Sep/1

4

Oct/14

Nov/1

4

Dec/1

4

Jan/

15

Feb/1

5

Mar/

150.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Services Exports: Still Weak

Jun/13 Sep/13 Dec/13 Mar/14 Jun/14 Sep/14 Dec/14 Mar/153%

4%

5%

6%

7%

8%

9%

10%

11%

12%Aggregate

Private

Public

Projects Under Implementation : Stalling Rate Declines in 2014-15

Jan-

14

Feb-1

4

Mar

-14

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-1

4

Sep-1

4

Oct-14

Nov-1

4

Dec-1

4

Jan-

15

Feb-1

5

Mar

-15

5.0

7.0

9.0

11.0

13.0

15.0

17.0

Nominal

Real

Real Bank Credit Growth Started picking up in Q4:2014-15

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

5.0

10.0

15.0

20.0

25.0

30.0

Real growth in financial loans to corporates

Including ECB Including ECB and Trade credit5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0 Including ECB and corporate bonds

Corporate Financing picked up in FY2014-15

Assessing Growth in Short Run

• Y = C+ Ipvt+ Ipub + FD’+ (X-M)

• X-M weak because of slowing world growth and appreciating real effective exchange rate

• Ipvt weak—Balance sheet stresses in corporates and banks

• Fiscal (FD’): small consolidation

• Therefore economy reliant on C and Ipub

Q1:

11

Q2:

11

Q3:

11

Q4:

11

Q1:

12

Q2:

12

Q3:

12

Q4:

12

Q1:

13

Q2:

13

Q3:

13

Q4:

13

Q1:

14

Q2:

14

Q3:

14

Q4:

14

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Manufacturing value added

Core WPI

Quaterly IIP Growth rate

Trend in IIP better than indicated by the Series

Uptick in Indirect Tax Collection in April 2015: Most Recent Indicator of Economic Activity

Tax Head Growth

(after netting out additional revenue measures; April 2014 number in

brackets)

Customs 13.5% (-11.7%)

Central Excise 8.8% (-3.9%)

Service Tax 7.0% (14.3%)

Excise plus service tax 7.8% (6.1%)

Total 9.8%

Assuming buoyancy of between 0.9 and 0.8, nominal GDP growth is between 10.9 % and 12.3%. Real GDP growth, assuming GDP deflator of 3 percent, is between 7.7% and 9%

Conclusion-1• Substantial Structural Reforms

Governance Institutional Macroeconomic policy SectoralDecisive reduction in corruption reflected in;

i. Clean and transparent auction of coal and spectrum

ii. Liberalization of gold import regime, reducing the rents intrinsic to quantitative restrictions

i. Unleashing cooperative and competitive federalism by adopting FFC recommendation and creating Niti Aayog

ii. Close to securing political agreement to launch game-changing GST

iii. Pursuing the JAM agenda in cooking gas

iv. Pursuing financial inclusion by creating Jan Dhan accounts

v. Initiating comprehensive social security via pension, life insurance and accident schemes

i. Commitment to fiscal discipline

ii. Increasing public investment to revive growth

iii. Facilitating declining inflation via agricultural policies

i. Liberalizing FDI in insurance, defence, and railways

ii. Deregulating diesel, petroleum, and cooking gas sectors and adhering to the commitment to deregulation

iii. Easing the cost of doing business

Conclusion-2

• Post war history suggest structural reforms take time to influence growth

• Policy support is crucial over short run, especially consumption, public investment, and private investment