Economic Survey: A Primer and Countdown to the Budget

Fiscal Consolidation:
At the countdown to the Budget, the Economic Survey sees the country growing at 7 – 7.5 % in the next fiscal and surpassing the magical 8 figure mark in the next couple of years. Fiscal consolidation has been in the government’s radar topmost, and the ambitious target of fiscal deficit@ 3.9% of GDP is likely to be met this year. However, the increased target of 3.5% in the next fiscal looks challenging. Though it must be said that this is the best opportunity that the government has, and ought not to miss it.

CPI inflation is seen to be around 4.5 to 5 % for the fiscal 2016 – 17 and the prospect of low oil prices in the mid-term, boosts confidence that prices will remain stable. The RBI Governor must also be credited here for being almost fanatical about keeping inflation under check and not get carried away by lowering of interest rates beyond a point. He was able to walk the tightrope, and yet reduce interest rates by 25 basis points every quarter for five straight quarters. Though, coming under a lot of criticism for sacrificing on short-term growth and liquidity, he held his ground firm. His pragmatic stance seems to have been vindicated.

The country needs to brace itself against fluctuations in major currency in Asia, especially the Yuan. Also, the pound weakened against the dollar this week, in response, amidst fear of the possibility of Britain moving out of EU (Brexit) after the June referendum. Rupee is currently trading at 68.77 against the dollar. It is worthwhile to mention here, that the IT BPM sector is expected to grow between 10 – 12% in constant currency terms in the next 12 months. A sector that is driven by exports, cross-currency headwinds have significant impact.

Bank balance sheets remain stretched, and NPAs are worrisome which may result in short-term liquidity crunch. Also, at this juncture, the government’s divestment plans need to be monitored closely to see if additional funds may be released in the short term to meet gaps if any.

Productivity of crops like wheat, paddy and pulses are falling. The sector as a whole is facing severe challenges after battling two less-than-favourable monsoons. Fall in demand in agriculture will have an adverse impact on both upstream and downstream industries.

Overall exports has had a negative growth in the last 12 months but is expected to pick up in the next fiscal. Though, falling commodity prices augurs well for exports. If China’s export competitiveness declines further, then there is a possibility that India may leverage this and foray into new markets. Though, to maintain an overall geo-political stability in the South Asia region, it should not be perceived as schadenfreude. It is in our own interest that the entire region remains prosperous and shows growth.

Overall Spend:
The disbursements as per the Seventh Pay Commission will definitely have a substantial impact on the exchequer. It will be interesting to observe how the balancing act will be done. It must be reiterated here that it is absolutely essential that government spends on healthcare, infrastructure and education cannot be affected, and warrant a quantum jump. Yesterday’s Rail Budget which focused on Capacity Building and infrastructural growth, paves way for a promising future.

IT BPM Sector outlook:
Remains positive. The industry has exhibited immense confidence in large visionary projects like Digital India, Smart Cities Mission, Make in India and Startup India to name a few. In the last 18 months, the ease of doing business index has shown a jump of 12 ranks (presently at 130th) and the targeted rank of 50, may be achieved sooner than we think. Reinforcing our belief, the Railway Budget also lay a huge emphasis on how technology can be levered to bring about remarkable transformation in the sector. India remains a cost competitive destination globally, and low inflation rates will help maintain this position. The overall economy is growing at 7.3% presently, and it really augurs well for the industry that we are growing at a much faster rate and staking a claim of contributing more than 8.5% to the country’s GDP. Most encouragingly, exports have crossed 100 billion USD and growing at more than 10% whereas overall exports of the country has shown negative growth. The country’s biggest strength lies in its demography – the youth. We are at the cusp of great change. We expect there will be substantial investment in skill building and infrastructure to optimize on what we already have.

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