New Delhi, Jan 29 (IANS) While forecasting a growth projection of 7 to 7.5 per cent for 2018-19, Chief Economic Adviser Arvind Subramanian on Monday said there were both upside potential and downside risks to this “baseline forecast”.

While on one hand, better export growth and expeditious progress of the Insolvency and Bankruptcy Code (IBC) could lead to higher Gross Domestic Product, higher oil prices, sharp corrections to elevated stock prices and “sudden stall” in capital flows could drag down the GDP growth, he said.

“In a sense, the current macroeconomic conjecture is about both the story of revival and the story of risks. This duality of revival and risk, in some ways, reflects the current state of macroeconomic policy,” the Chief Economic Adviser (CEA) said at a press conference after Union Finance Minister Arun Jaitley tabled India’s Economic Survey for 2017-18 in Parliament.

Subramanian said that growth was picking up partly because the temporary impact of demonetisation and Goods and Services Tax had dissipated and also because exports had picked up quite briskly in the last few quarters.

“Corrective actions have been taken. The government is injecting a fair amount of demand into the economy,” he said.

“If you look at the last four quarters, you will see that manufacturing export growth is about 11.3 per cent, which is very healthy and broadly in line with where the world economy is going.”

“So exports are driving growth, the temporary factors are receding, private investment going forward but will depend a lot on capacity utilisation and the progress under the IBC, consumption is going to be a bit of a challenge due to rising oil prices going forward,” Subramanian said.

He added that going forward next year, because of all these factors, the growth would rise between 7 and 7.5 per cent, which was comparable to the International Monetary Fund and World Bank projections.

However, sounding a word of caution, the CEA said there was both upside potential, and also challenges and risks which need to be factored in.

He said if oil prices remained at current levels, there could be challenges to growth.

“We know the rule of thumb: For every $10 increase in oil prices, GDP growth comes down by 0.2 to 0.3 per cent, the current account deficit will deteriorate by 0.4 per cent of the GDP or $10 million. Inflation will also be higher by 0.2 to 0.3 per cent. So I think we need to watch oil prices very carefully.”

He added that sharp corrections to elevated stock prices was another risk.

“Also, having seen emerging market experiences around the world for the last 20-25 years, I think we should always be watchful when the macro risks mount. When asset prices are high, you get this emerging markets ‘sudden stall’.

“There’s a famous phrase sudden stop of capital flows. But in India we should not worry about anything serious but sudden stalls in capital flows. Because macro policies will then have to be tighter and then you have a classic dilemma of stability and growth,” Subramanian said.

However, he added that higher export growth could boost the country’s GDP.

“We find that exports are growing in line with world growth. There is a kind of standard elasticity. But that is still lower than what this response of export was in the previous period.

“So if export responsiveness picks up, export growth could be higher and overall GDP growth could be higher,” he said.

The CEA added if the Insolvency and Bankruptcy Code process progresses well and expeditiously — and if actions happen on time and are accepted without glitches — then there was a chance that private investment picking up “after so many years of languishing”.

Talking about the policy agenda for the year ahead, he said the government didn’t have to do something new and radical, but just finishing what it had already started would be a “very ambitious and a very fantastic agenda to complete”.

“Supporting agriculture because we know there are stresses in the agricultural sector. Stabilise the GST. Complete the twin balancesheet actions,” he said while listing out policy actions for the next fiscal.

“Resolution and recapitalisation must be accompanied by reforms to shrink the nonviable ones and to signal greater private sector participation in the better ones. Finish privatising Air India. And head off any macroeconomic pressures and the possibility of a sudden stall from rising oil prices and sharp stock corrections.”

The CEA acknowledged that his growth projection for 2017-18 at 6.75 per cent was higher than the Central Statistics Office estimate.

“That’s because the CSO (Central Statistics Office) had itself acknowledged that they weren’t able to fully take account of recent developments.

“Also inflation is higher in the second half compared to the first half which they weren’t fully able to incorporate. So I don’t think they would contest this projection in any way,” he said.

–IANS
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