India’s economic growth, which is expected to rebound from a five-year low to 7 per cent this year, now needs to shift gears to accelerate and sustain a higher growth rate to become a USD 5-trillion economy by 2024-25, the pre-Budget Economic Survey said on Thursday.
Investment rate, which was been declining from 2011-12, seems to have bottomed out, and is expected to pick up in consumer demand and bank lending.
However, economic slowdown impacting tax collections and rising state expenditure on farm sector may put strains on the fiscal front, the survey presented in Parliament by Finance Minister Nirmala Sitharaman said.
The real gross domestic product (GDP) growth, which slowed to a five-year low of 5.8 per cent in the first three months of 2019 – well below China’s 6.4 per cent – is expected to rise to 7 per cent in the fiscal year 2019-20 that started in April.
GDP growth was 6.8 per cent in the previous 2018-19 fiscal year, down from 7.2 per cent in 2017-18.
The expansion in the economy will be driven by investment and consumption, with political stability auguring well for the growth prospects, it said adding that the upside and downside risks to growth are evenly balanced with monsoon rainfall seen tipping the scales.
But for India to become a USD 5-trillion economy – more than double the current size – by 2024-25, it needs to sustain a real GDP growth rate of 8 per cent, which international experience suggests is possible only through a sustained “virtuous cycle” of savings, investment and exports.
“The political stability in the country should push the animal spirits of the economy, while the higher capacity utilisation and an uptick in business expectations should increase investment activity in 2019-20,” the survey said.
Authored by Chief Economic Adviser Krishnamurthy Subramanian, the survey stated that investment (especially private) is the ‘key driver’ that boosts demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction and generates jobs.
Oil prices, the Economic Survey 2018-19 said, will decline in current fiscal, pushing consumption. Consumption accounts for about 60 per cent of the GDP.
“However, downside risks to consumption remain. The extent of recovery in the farm sector and farm prices will decide the push to rural consumption, which is also dependent on the situation of monsoon,” it said adding that some regions are expected to receive less than normal rains, which could prove to be detrimental for crop production.
“If the impact of stress in the non-banking financial company (NBFC) sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending,” it said.
The survey suggested policies to unshackle micro, small and medium enterprises (MSMEs) to grow, create jobs and enhance productivity. It also called for reorienting policies to promote young firms which have the potential to become big, rather than MSME firms which remain small.
The survey flagged the need to prepare for the ageing of the population, necessitating more healthcare investment and raising the retirement age in a phased manner.
Highlighting the immense potential of data of societal interest, the survey said data should be “of the people, by the people, for the people”.
Stating that low pay and wage inequality remain serious obstacles towards achieving inclusive growth, it called for legal reforms, policy consistency, efficient labour markets and use of technology focus areas.
Contract enforcement, it said, remains the biggest constraint to improving Ease of Doing Business ranking.