By TT Ram Mohan
The growth rate of 8 per cent in the last quarter has revived talk of a return to 8 per cent growth rate in the near future. I’m afraid, this is highly unlikely.
In 2015-16 the Indian economy grew at 7.6 per cent compared to 7.2 per cent in 2014-15. This was mainly on account of the steep fall in oil prices which translated into a surge in private consumption and also into higher government capital expenditure through higher taxes on oil products.
The hope was that this bonanza would continue in 2016-17 although in a muted form, with oil prices falling further to $30. This hope is being dashed by the rebound in oil prices to $50, which was the average for 2015-16.
This takes away the whole of the contribution of 1-1.5 percentage points to growth that arose from the sharp fall in oil prices in 2015-16.
Some analysts think this will be compensated by greater rural consumption following better monsoons and better urban consumption because of the Pay Commission hike. I estimate the benefits on account of this two factors at 0.3 per cent and 0.6 per cent of GDP respectively. As you can see, this doesn’t compensate for the impact of oil prices.
Another blow is that the world economy is not only not reviving but is likely to slow down. The Economic Survey (2015-16) expected exports to contribute a solid 1.3 percentage points to growth. This looks likely to get washed out.In fact, export growth could slow down even further, dragging down economic growth.
Lastly, analysts have been making a hoopla over increased public capital expenditure. They overlook the fact that this is being offset by compression of government expenditure on other counts and also higher taxes. The fiscal deficit is going to shrink by 0.4 percentage points. That, basic economics should tell us, means a shrinkage in demand from the government. Using a multiplier of 1, this means minus 0.4 percentage points of growth.
I add up the numbers and find that the Indian economy is likely to grow at 7 per cent rather than 8 per cent in 2016-17- unless oil prices fall back to well below $50.
That’s the short-run view. The medium-term outlook is just as sombre. Whoever is forecasting a return to 8 per cent growth has some explaining to do.
T T Ram Mohan is a professor of Finance and Accounting at IIM, Ahmedabad.
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