Based on the Economic Survey 2018-19, India Ratings and Research (Ind-Ra) believes investment, especially private investment, will be the key driver of accelerating and sustaining gross domestic product (GDP) growth at or around 8.0%, which will aid India in becoming a $5 trillion economy by FY25. The survey projects a 70bp increase in the total factor productivity compared to the US, a constant real effective exchange rate resulting in USD/INR at 75 in March 2025 (3 June 2019: INR68.79) and 4% inflation. The export growth is hypothesised to come from increased productivity instead of nominal currency depreciation.
The survey states that a virtuous cycle of savings, investments, exports and growth with investment as the central driver will aid India in becoming a $5 trillion economy. However, the government needs to focus on investments in infrastructure as it eventually crowds in private investment.
This is easier said than done especially against the backdrop of a significant decline in savings/GDP ratio. India’s current savings/GDP was 30.5% in FY18 (FY17: 30.3%, FY16: 31.1%). The household’s segment, which includes unincorporated enterprises, is the only net saver in the economy as per the institutional classification. The segment’s financial savings net of financial liabilities increased to Rs11.29 trillion in FY18 from Rs6.43 trillion in FY12. However, net central government, state government and extra budgetary resources borrowings grew at a CAGR of 10.7% to Rs11.55 trillion during FY12-FY18. If the government continues to borrow in a similar fashion, financing both the government and private investments using the domestic savings will become difficult. Clearly, the alternative would be to rely on foreign savings but this would expose the economy to widening current account deficit with its associated consequences.
The Economic Survey 2018-19 bats for exports and argues that it must form an integral part of the growth model because higher savings would preclude domestic consumption as the driver of final demand. However, Ind-Ra believes exports have been playing an important role in accelerating India’s GDP growth over the past one and a half decades. The share of exports (goods and services) in India’s GDP increased to 25.4% in FY14 from 12.8% in FY01, but declined thereafter to 19.7% in FY19. However, given the external environment has changed dramatically post the 2008 global financial crisis and is now turning into repeated trade frictions, accelerating exports growth would be challenging. Rising protectionism and weak global demand have chiefly been responsible for the decline/low growth of India’s exports during FY15-FY18.
The survey expects Indian economy (GDP) to grow at 7.0% in FY20 (FY19 advance estimates: 6.8%), which looks plausible.
The survey has also introduced few new themes including behavioural economics, which provides insights to nudge people towards desirable behaviour. However, the use of this concept in framing and implementation of the policy relating to the social sector remain to be seen. The survey made an observation that central bankers in many countries focus on core inflation; this could have implication on future inflation targeting framework.