India is a fast-growing economy, but don’t expect it to sprint

There is a sense of cautious optimism about the economy in the finance ministry. There is no longer an expectation of an 8 per cent growth in the coming fiscal year. The Economic Survey for 2015-16 tabled in Parliament on Friday estimates that a 7-7.75 per cent growth in 2016-17 would be a more realistic expectation when the world is increasingly becoming a "grim place”.

The survey has also taken a more realistic assessment of the change of events both within the country and outside. Last year, the survey said India was in a sweet spot due to "a combination of strong political mandate and favourable external environment".

The world economy turned weak since then and the vast political mandate for the NDA government has not yet resulted in significant reform measures. So, the survey has revised its stance: For now but not indefinitely, the sweet spot for India is still there.

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Yet, with 7-7.75 per cent growth India will be the fastest growing major economy in 2016-17. Where will the growth settle depends a lot on the world economy and India’s agriculture sector. Both are variables which the government of India cannot control.

"If the world economy lurches into crisis or slides into further weakness, India’s growth will be seriously affected, for the correlation between global and Indian growth has been growing dramatically,” says the survey. Despite this gloomy outlook, the survey says India stands out as a haven of stability and an outpost of opportunity. Its macro-economy is stable, founded on the government’s commitment to fiscal consolidation and low inflation.

Exports depend on the state of the world economy, and agriculture on monsoon rains. So far, indications are that the world economy will grow slowly but the monsoons are expected to be normal following the weakening of El Nino phenomenon. Exports of manufactured goods and services together account for 18 per cent of the GDP and the contraction of the exports in 2015-16 is one of the reason Indian economy grew lower than previously estimated this fiscal year.

The underperformance of monsoon hurt not just agriculture output but also rural demand in 2015-16, leading to scaling down of growth estimates for the current year from 8-8.5 per cent to 7-7.5 per cent.

While growth expectations are cautious, there is no cause for worry on inflation. The Economic Survey estimates inflation, measured by consumer price index, could settle between 4.5 per cent and 5 per cent. That is lower that where the RBI expects inflation to settle next year. Again, it is global slowdown that will keep inflation benign.

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Petroleum and other commodity prices are expected to remain soft in the year ahead. At least that’s the expectation at the moment. However, if crude oil supplies are disrupted, there is a risk of prices rising and putting upward pressure on inflation.

So, can something be done to help growth in Indian given global environment? Especially when the Economic Survey feels that India is still oozing potential and its long run potential growth rate is still around 8-10 per cent.

Chief economic advisor Arvind Subramanian says addressing exit problems that bedevil the economy is essential to enable the economy to realise its potential. It is about helping businesses to get out of a chakravyuha and reallocate resources into activities where they can be put to more efficient use. Closing down business, particularly an unviable enterprise, is extremely difficult in India. The Indian economy had moved from socialism with restricted entry to "marketism" without exit.

It is now over to the Union Budget to lay down the roadmap to stimulate growth. The Economic Survey has several recommendations on what the government needs to do – on increasing spending, cutting subsidies, rationalising taxes, containing fiscal deficit, stimulating global trade and policy measures that need to be implemented outside the budget. Perhaps, finance minister Arun Jailtely will heed some of the good advice.