The Indian economy has the engines for growth to cruise at 8% to 10%, but strong global headwinds mean that in the immediate future it's more likely to grow at somewhere between 7% and 7.75%, said the government's annual Economic Survey, released on Friday.
On the whole, the Survey was bullish on India, describing it as a "haven of stability and an outpost of opportunity" in a gloomy global scenario. It pointed out that "for an economy where exports have declined due to weak global demand and private investment remains weak, India's economy is performing remarkably well". At the same time, though, it cautioned that "if the world economy lurches into crisis or slides into further weakness, India's growth will be seriously affected", because Indian growth is much more aligned with the global economy than in the past.
One risk that India must plan for is a major currency re-adjustment in Asia following the devaluation of the Chinese currency, the survey said, since such an event would spread deflation around the world.
On the other hand, the extra incomes in people's hands from the pay commission awards and a possibly good monsoon this year could come as positives, the Survey noted. In general, it said, India must accept that foreign demand was likely to remain weak and domestic demand must be boosted to make up for that. Giving a detailed analysis of why India's growth potential remains at 8-10%, the Economic Survey has admitted that there is a perception that the government had not done enough to realise this potential. The perception, it added, was partly due to inadequate appreciation of all that has been done, while admitting that there were some genuine disappointments, like the Goods and Services Tax legislation getting stalled and disinvestment not progressing as planned. It also counted incomplete subsidy rationalisation and stressed corporate and bank balance sheets among the disappointments.
"Accelerated structural reforms at the Centre, the dynamism of competitive federalism and good economics being good politics could all combine to maintain the fundamental promise that is India.
For now, but not indefinitely, the sweet spot created by a strong political mandate but recalibrated to take account of a weaker external environment is still beckoningly there," it said.
Making a strong pitch for lowering interest rates, the Survey argued that "the benign outlook for inflation, widening output gaps, the uncertainty about the growth outlook and the over-indebtedness of the corporate sector", all implied that that there was room for bringing down rates. On fiscal policy, while the Survey underlined its importance in a medium to long-term framework, it left the issue of whether there should be aggressive action now or a more gradualist approach to bringing down the deficit open. Presenting both sides of the argument, it said, "The Union Budget will carefully assess these options."
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