Government cuts 2015-16 growth forecast to 7-7.5%

Despite of lowering the growth forecast, the government has maintained its budgeted fiscal deficit target of 3.9% of GDP for FY16 without cutting expenditure or deferring tax refunds.

The Centre also warned that the proposed wage hike for central government employees by the Seventh Pay Commission could adversely impact the fiscal deficit.

It further said: “Indirect taxes have fared better than direct taxes, probably because corporate profits have not been buoyant, reflecting a slowing nominal GDP”.

The government also said retail inflation for 2015-16 is expected to be at 6 per cent, while lowering its growth forecast for the Indian economy to between 7-7.5 per cent.

On CPI inflation, the Finance Ministry report sees it to be within the RBI’s target of about 6 per cent.

Says economy will grow at 7-7.5% in current fiscal against earlier projection of 8.1-8.5%.

The Economic Survey presented in February this year had estimated growth at 8.1-8.5 percent.

According to the latest roadmap laid out in the budget for 2015-16, the government is targeting a fiscal deficit of 3.5 per cent in 2016-17 and 3 per cent in 2017-18.

Finance Minister Arun Jaitley said reforms have addressed the critical problems of stimulating and stabilising the economy.

Given the continuing weakness in private investments, India needs to keep the tempo of public investments going, even accelerate them to bolster economic growth, the Mid-Year Economic Analysis report has suggested.

But the fiscal outlook for 2016/17 looks challenging and the government will need to reassess its commitment to cut the deficit further by 0.4% of its GDP in the financial year that begins in April, the report cautioned.

India’s Chief Economic Advisor Arvind Subramaniam on Friday said “the economy is sending mixed signals”.

India’s achievement of being one of the fastest growing economies of the world is “creditable considering that the global economic situation continues to be uncertain transmitting negative spill-overs, because of which emerging markets and developing economies have, in general, become more vulnerable and fragile”.

It, however, pointed out a contradiction in this context – from a demand perspective, the positive effect of a larger public (productive) investment is offset by a combination of lower other expenditures and higher tax receipts. The focus on the rupee-dollar rate conveys a misleading impression about the stability of the rupee. He added that the GST, bankruptcy code and measures to boost agricultural output were some of the major steps this government would need to take.

Also, the subsidy gains from declining global prices will not be available and the decline in nominal GDP growth will exert stress on revenue collection.