Economic Survey 2018 has not given into the impulse of painting a rosy picture

Economic Surveys are supposed to provide details of what had happened in the economy during the last one year and based on those data points, they identify the likely path the economy could follow over next year. To that extent the latest Economic Survey has done its job as it has taken a critical look at the some of the finer points of the economy and in doing so has not painted an extremely rosy picture.

The good part is that growth projection for 2019 has been kept at 7 to 7.5 per cent. As far as these numbers are concerned, they are very much achievable in the current macro environment locally and globally. Our hope stems from the fact that after stabilisation, collection of the goods and services tax (GST) collections have started rising and are likely to inch upwards in the coming months as the e-way bill will get implemented.

But there are certain complicated global macro risks which, have been stated in the survey but the extent to which they can hurt the economy seems to have been missed. This could have happened because the government does not want to put a number to those risks and that is perfectly justified. But it would be better that our policy makers should have a Plan B in place because, these risks are the ones where, despite all the good intentions, the government cannot do much. So, having an alternate plan on how to mitigate the impact is the only solution.

There are two big risks which are staring at the Indian economy. First – the oil prices. This has been mentioned in the survey but there is more to the oil price risk. While international oil prices have risen, they have risen only in the last four months. The full impact of the high oil prices is still not getting reflected in the margins of companies, because in most cases, six-monthly contracts are signed in which is a part of the price rise borne by the supplier. But, if oil prices stay at elevated levels for another six months, there would be pressure on the margins on all the goods and services where oil and oil derivatives are used as raw material and there is no dearth of those goods. The moment that happens, the upside risk to inflation will rise. That will kick-start the trouble cycle – not only a rise in inflation, it would inhibit the RBI against any interest rate cut. There is a possibility that the central banker might be forced to raise interest rates and the interest rate cycle could turn much faster than expected. Also, an increase in oil prices would cut disposable income in the hands of consumers and that would bring its own set of complications.

The second big risk is the change in the currency cycle. For over one year, the dollar has been sliding southward and the rupee has been stable. The fact that the US treasury secretary has openly indicated a preference for a weak US dollar is probably only positive. But given the fact that the US Fed is on course to raise interest rates, it is only a matter of time that the rupee feels the heat. Now, the weakness in the rupee may not matter because as a currency, the Indian rupee had been outperforming other currencies in terms of strength. Of course, this has been hurting our exports. The trouble lies in the fact that high oil prices and a weaker rupee potentially lead to a situation where the rupee goes below the desired levels. That would bring trouble to the debt markets where there exists an uneasy calm. Given the growth in the retail lending segment, any problem in the debt market could be much more troublesome than what it had been when earlier when debt markets witnessed similar volatility.

The only big positive which the economic survey brings is the rise in the number of indirect tax payers. Around 10 million new indirect tax payers have been added in the GST regime. While a number of them would be under the composition scheme, revenue from them would be minimal in the coming years. But this addition to the base of indirect tax payer means that the owners of firms, who have now started paying GST, will also start filing their direct tax returns. That is something which would give the required push to the pace of formalisation of the economy.