India Offers a Big Caveat to its 8.5% Economic Growth Forecast

 

Workers labor at the roadside below an elevated track near DLF Cybercity in Gurgaon, India.

(Bloomberg) -- India doesn’t want anyone to think growth of 8.5 percent means its economy is booming.
The Finance Ministry ministry made the projection for the fiscal year starting April 1 after the Statistics Ministry revised the way it calculates gross domestic product last month. The forecast of 8.1 percent to 8.5 percent growth is by far the fastest pace among major economies.

“The latest numbers will have to be the prism for viewing the Indian economy going forward because they will be the only ones on offer,” a team of Finance Ministry advisers led by Arvind Subramanian, wrote in a report today. “The balance of evidence,” they said, is “in favor of viewing India as a recovering rather than surging economy.”

Finance Minister Arun Jaitley will use the projections when he presents his budget on Saturday, an event eagerly awaited by investors who have poured money into the country. Indian stocks surged the most in five weeks today, and the benchmark 10-year government bond rallied the most in two weeks.
“It’s heartening to note that the economic survey believes that the worst for the economy is clearly over,” Jaijit Bhattacharya, a partner at accounting firm KPMG, said by e-mail.
The direction of growth isn’t in doubt. Lower oil prices have opened up room to ease one of Asia’s highest interest rates and lower a subsidy bill that accounts for about 15 percent of India’s expenditure. Consumer price inflation will be between 5 percent and 5.5 percent in the coming year, below the central bank’s 6 percent target, the report predicts.

‘Big Bang’

The authors also said policy steps by the nine-month-old government could cumulate into “big bang” reforms.
“India has reached a sweet spot -- rare in the history of nations -- in which it could finally be launched on a double-digit medium-term growth trajectory,” the report stated. “This trajectory would allow the country to attain the fundamental objectives of ‘wiping every tear from every eye’ of the still poor and vulnerable.”
Even so, the authors noted that not all is well.
Private investment is at the slowest pace in at least a decade and investors are still crowded out by the widest national budget deficit among the largest emerging markets.
Inflation, while slowing, will probably allow only limited room to ease the benchmark interest rate far below the existing 7.75 percent given Reserve Bank of India Governor Raghuram Rajan wants to offer savers a return of about 2 percentage points.
The biggest problem with the data appears to be the 6.9 percent surge in the last fiscal year, which occurred despite slowing imports, capital outflows, a decline in investment, stalled projects and stressed balance sheets.
“Until a longer data series is available for analysis and comparisons -- and until the changes can be plausibly ascribed to the respective roles of the new base, new data, and improved methodology -- the growth narrative of the last few years may elude a fuller understanding,” the authors wrote.
To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net