Economic Survey 2018: Increased growth rate, likely recovery in private capex among top 10 takeaways

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The Economic Survey 2017-18 tabled in the parliament on Monday cemented hopes of a turnaround in the economy in 2018-19. Due to this Indian stock market gave positive reviews. However, concerns about the rise in oil prices and elevated asset prices

While Nifty 50 was flying near its record highs, the S&P BSE Sensex was trading comfortably above 36,300 levels. There was no sell-off at higher levels which suggests that investors took the survey in a positive way.

Now the government will have to focus on the 4R’s over the coming years. The government will have to ensure that the process of settling the major indebted cases and recapitalising the public sector banks in carried to a successful conclusion, while launching reforms of the PSBs that will credibly shorten the unviable ones and signal greater private sector participation in the future, said the Survey document.

The government is also expected to stabilize GST implementation to eliminate ambiguity for exporters, facilitate easier compliance, and expand the tax base.

The government must hold off any nascent perils to macroeconomic stability, reputably from persistently high oil prices, and sharp, disruptive corrections to elevated asset prices.

Here is a list of top 10 takeaways from market’s point of view:

Possible correction in stock markets?

It’s apparent that the markets rapid growth would warrant the run-up in stock prices, however, are also pricing in some macro-balance concerns. Likewise, even the rating rise carried signs of potential macroeconomic challenges.

Asset estimation (price-equity ratios) tend to return to their mean. And the faster and higher they climb, primarily so late in the economic cycle, the greater the risk of sharp corrections.

Concurrently high valuations of both bonds and equities lead to be short-lived, for they experience an acute tension. Should the future earnings and economic growth grow bright, sustaining high equity prices, interest rates cannot be forever so low.

Furthermore, if interest rates increase—or if markets even sense that central banks will be required to shift their stance—both bond and equity prices could correct sharply. A plausible scenario would be the following, said the survey.

Higher Growth Rate

Past years, a series of major reforms were undertaken which will let real GDP growth to reach 6.75 percent this fiscal and will rise to 7.0 to 7.5 percent in 2018-19. Thus it will re-instate India as the world‘s fastest-growing major economy, said the Survey document.

This was mentioned in the Economic Survey 2017-18 which was tabled in Parliament today by the Union Minister for Finance and Corporate Affairs, Arun Jaitley. It said that the reform propositions initiated in 2017-18 can be mounted further in 2018-19.

Private Investment

It appears that private investment is poised to rebound, as many of the factors exerting a burden on growth over the past year ultimately ease off. Elucidating this potential into an actual investment rebound will depend on the resolution and recapitalization process.

Should this method moves ahead expeditiously, stressed firms will be put in the hands of stronger ownership, admitting them to resume spending. However, if the resolution dallies, so too will the return of the private capex cycle.

And, if this transpires, public investment will not be worthy to step into the break since it will be restrained by the need to maintain a modicum of fiscal consolidation to head off market anxieties.

Increase in Taxpayers Post-Demonetisation

One of the goals of demonetization and the Goods and Services Tax (GST) was to enhance the formalization of the economy and bring more Indians into the income tax net. It only includes about 59.3 million individual taxpayers, equivalent to 24.7 percent of the estimated non-agricultural workforce. Has this happened and to what extent?

Initially, there does appear to have been a large expansion in the number of new taxpayers. After November 2016, 10.1 million filers were added compared with an average of 6.2 million in the preceding six years.

Crude oil likely to rise

During the last three fiscal years, India endured positive terms of trade shock. However, in the first three quarters of 2017-18, oil prices have been nearly 16 percent higher in dollar terms than in the previous year. According to an estimation, a USD 10 per barrel increase in the price of oil lessens growth by 0.2-0.3 percentage points.

Persistently high oil prices (at current levels) continue a key risk. They would influence inflation, the current account, the fiscal position, and growth, and force macroeconomic policies to be tighter than otherwise.

Stock Market Boom and Equity Raising

When stock prices increase, as they have done in the past two years, companies announce more equity publicly, taking the influence of the deflated cost of capital to begin on new investment projects, which occurred in the mid-2000s and again around 2010.

During the last two years, particularly in the first eight months of this year, there was yet again been a pick-up in equity-raising activity. If prevailing trends remain, the number of issues and their cost could double the levels recorded in the previous six years.

Fiscal Deficit

For the first eight months of 2017- 18, the fiscal deficit touched 112 percent of the total for the year, reaching beyond the 89 percent norm (average of last 5 years), chiefly because of a shortfall in non-tax revenue, showing reduced dividends from government agencies and enterprises.

Expenditure also improved at a fast pace, indicating the advancing of the budget cycle by a month which gave significant space to the spending agencies to plan in advance and begin implementation early in the financial year.

Somewhat offsetting these trends will be disinvestment receipts that are possible to exceed budget targets.

GST Revenue Collections

Surprisingly, GST revenue collections are robust given that these are early days of such a disruptive change. Government steps to curb black money and encourage tax formalization, incorporating demonetization and the GST, have increased personal income tax collections considerably (excluding the securities transactions tax).

From about 2 percent of GDP between 2013-14 and 2015-16, they are prone to advance to 2.3 percent of GDP in 2017-18, a historic high. Explicit evaluations of the government’s contribution to this development alter depending on the methodology used.

Rise in Bond Yields

Bond yields have progressed distinctly since August 2017, revealing a variety of factors, including anxieties that the fiscal deficit could be greater-than-budgeted, expectations of soaring inflation, a rebound in activity that would dwindle the output gap, and expectations of rate increases in the US.

Due to this, the yield curve has become unusually steep. Another factor providing to the growth in bond yields has been stepped-up Open Market Operations (OMO) by the RBI.

This amounted to a net sale of nearly Rs. 90,000 crore through April-December 2017-18 (compared to a net redemption of Rs. 1.1 lakh crore during the same period in 2016-17) to sterilize the impact of foreign flows, themselves induced by high-interest rates.

Fiscal Consolidation Path

An important policy question will be the fiscal path for the coming year. Provided the imperative of establishing likelihood after this year, as the enhanced outlook for growth (and hence narrowing of the output gap), and given the resurgence of price pressures, fiscal policy should ideally have targeted a reasonable fiscal consolidation.

Nevertheless, setting overly lofty targets for merger—particularly in a pre-election year—based on promising predictions that carry a huge gamble of not being realized will not garner credibility either.


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