Indian Economy: An Interim Update

Chief Economic AdviserMay 26th, 2015

Good News: Improving Inflation and Inflation Prospects

Improving Quality and Quantity of Fiscal Consolidation at General Government LevelBased on analysing 17 State Governments Budgets.

Fiscal Indicators of General Government (% of GDP)2014-15 RE2015-16 BEFiscal Deficit6.96.5Revenue Deficit2.92.4Capital Expenditure4.65.1RE= Revised Estimates; BE= Budget Estimates;

Current Account Balance as a per cent of GDP

Assessing Growth in Short Run Y = C+ Ipvt+ Ipub + FD+ (X-M)Where, Y= OutputC= Consumption Ipvt= Private InvestmentIpub= Public Investment FD= Fiscal Deficit net of IpubX-M= Net Exports

Merchandise Trade: Yet to Recover

Services Exports: Still Weak

Projects Under Implementation : Stalling Rate Declines in 2014-15

NominalRealReal Bank Credit Growth Started picking up in Q4:2014-15

Corporate Financing picked up in FY2014-15

Assessing Growth in Short Run Y = C+ Ipvt+ Ipub + FD+ (X-M)

X-M weak because of slowing world growth and appreciating real effective exchange rate

Ipvt weakBalance sheet stresses in corporates and banks

Fiscal (FD): small consolidation

Therefore economy reliant on C and Ipub

Trend in IIP better than indicated by the Series

Uptick in Indirect Tax Collection in April 2015: Most Recent Indicator of Economic ActivityAssuming buoyancy of between 0.9 and 0.8, nominal GDP growth is between 10.9 % and 12.3%. Real GDP growth, assuming GDP deflator of 3 percent, is between 7.7% and 9%

Conclusion-1Substantial Structural Reforms

GovernanceInstitutional Macroeconomic policySectoralDecisive reduction in corruption reflected in; Clean and transparent auction of coal and spectrumLiberalization of gold import regime, reducing the rents intrinsic to quantitative restrictionsUnleashing cooperative and competitive federalism by adopting FFC recommendation and creating Niti AayogClose to securing political agreement to launch game-changing GST Pursuing the JAM agenda in cooking gas Pursuing financial inclusion by creating Jan Dhan accountsInitiating comprehensive social security via pension, life insurance and accident schemesCommitment to fiscal disciplineIncreasing public investment to revive growthFacilitating declining inflation via agricultural policiesLiberalizing FDI in insurance, defence, and railwaysDeregulating diesel, petroleum, and cooking gas sectors and adhering to the commitment to deregulationEasing the cost of doing business

Conclusion-2Post war history suggest structural reforms take time to influence growth

Policy support is crucial over short run, especially consumption, public investment, and private investment

*****Monthly Growth in Non-oil Exports and Non-oil, Non-gold Imports (3 month moving average, per cent)

*Services Export growth (3 month moving average)*Stalled Projects as per cent of Projects under Implementation (Value Terms)*Bank Credit Growth (3 month moving avg., in per cent)*Growth in Financial Loans to Corporates (% y-o-y end March)**Comparison of IIP, Core WPI and Manufacturing Value Added (growth %)****