By Vivek Mishra
Forecasts for a mild slowdown in India’s fast-growing economy held steady in the first Reuters poll of economists since the ruling Bharatiya Janata Party (BJP) lost its parliamentary majority in phased national elections that ended in early June.
Asia’s third-largest economy grew 8.2% in the last fiscal year, the fastest among major economies. But growth is set to slow to 7.0% and then 6.7% in the current and next fiscal years, according to a June 19-27 Reuters poll of over 50 economists.
The forecasts are broadly unchanged from those made before the outcome of an election Prime Minister Narendra Modi was widely expected to win easily. Instead, the BJP lost its sizeable parliamentary majority for its historic third term.
Forming a government with the support of regional parties, the BJP retained most ministers, suggesting no imminent shift in policy, which for years has aimed to boost gross domestic product (GDP) growth through government capital spending.
But without a follow-through in private expenditure, many Indians – particularly young people – have been left out of work or in low-paying jobs. With no major change to policy expected yet, economists left their forecasts steady.
“With a reduced majority now, I don’t expect any major growth-enhancing reforms whatsoever over the next five years,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.
“The reality is (that) consumption is weak. It’s just going to surface more in the GDP numbers because the lift from statistical discrepancies is fading.”
India’s economic growth in the three months through December was much higher than most estimates due to a sharp fall in key subsidies which provided a boost to GDP – a situation economists in the poll say is unlikely to recur.
The median 7.0% growth rate expected this fiscal year in the latest poll is slightly below the Reserve Bank of India’s (RBI) own forecast of 7.2%, which Governor Shaktikanta Das recently said could improve further in coming months.
“Growth is switching to a lower gear but will remain close to potential. I have baked in a modest private capex cycle pickup, not perhaps as strong as the RBI is factoring. And consumption (will) perform better but I don’t think it will become a growth driver,” said Dhiraj Nim, economist at ANZ.
Most economists expect the government to maintain a broad path of fiscal consolidation, but use a bumper dividend transfer from the RBI last month for higher spending in a budget likely to be presented in late July.
“The government has for years focused on infrastructure…, and that has slightly come at the cost of consumption. So I believe the budget can sort of provide some support, especially at the lower end of the economic spectrum,” Nim said.
The government is considering lowering personal tax rates to boost consumption, two government sources told Reuters.
Nearly two-thirds of respondents in the poll – 25 of 39 – said the government will not significantly alter its planned spending in its first full budget compared to the interim one. The rest said it will increase.
“The government is unlikely to reverse its policies despite receiving a lower-than-anticipated mandate. It (will) increase funding for employment guarantee schemes and create more jobs through a manufacturing push,” said Sanya Suri, senior Asia economist at Continuum Economics.
“However, the substantial surplus provided by the RBI and ongoing growth in tax receipts will fund these initiatives.”
Inflation is not expected to fall below the RBI’s medium-term target of 4% anytime soon – averaging 4.6% and 4.5% this fiscal year and next. But the RBI is expected to cut interest rates once this year, most likely in October-December.
(Reporting by Vivek Mishra; Polling by Veronica Khongwir, Devayani Sathyan, Susobhan Sarkar and Anant Chandak; Editing by Hari Kishan, Ross Finley)
