Economic Survey indicates Indian economy likely to see fastest growth in 2016

External Challenges

 

As per Economic Survey India is facing an unusually challenging and weak external environment. India needs to prepare itself for a major currency readjustment in Asia in the wake of a similar adjustment in China. Also it needs to address low growth in emerging markets due to capital controls to curb outflows of capital. To balance weak foreign demand, India needs to activate its domestic sources of demand to maintain growth momentum.

 

The Twin Balance Sheet Problem

 

The Twin Balance Sheet (TBS) problem implies the impaired financial positions of the public sector banks along with some large corporate houses. It is a major impediment to private investment and so to a full-fledged economic recovery.  As per economic Survey, Non performing assets (NPA) has been rising since 2010. The situation is not sustainable; a decisive solution is needed.

 

Economic survey points out that resolving the TBS challenge comprehensively would require 4R’s: recognition, recapitalization, resolution and reform. Banks must value their assets close to true value (recognition). Their capital position must be safeguarded via infusions of equity (recapitalization). The NPA’s in the corporate sector must be sold (resolution). And future incentives for the private sector and corporate must be set right to avoid repetition of the problem (reform).

 

Some steps have already been taken. The government launched the Indradhanush scheme for phased recapitalization of banks. The RBI also initiated the 5:25 and SDR schemes to incentivize banks to rehabilitate stressed assets. Most importantly, such moves need to be initiated jointly and cooperatively between the government and the RBI.

 

Recalibrating growth expectations

 

India’s long run potential GDP growth is substantial, about 8 to 10%. Since india’s exports of manufactured goods and services now constitute about 18% of GDP, its actual growth will depend upon global growth and demand. Reflecting India’s growing globalization, a 1 percentage point decrease in the world growth rate is now  associated with a 0.42 percentage point decrease in Indian growth rates. So, if the world economy remains weak, India’s growth will face considerable headwinds. Hence Economic survey points out that in the current global environment, there needs to be a recalibration of growth expectations and consequently of the standards of assessment.

 

Positive Impact of La-Nina

 

El Nino, an abnormal warming of the Pacific waters near Ecuador and Peru affects agricultural production in India. The 2015 El Nino has been the strongest since 1997. But if it is followed by a strong La Nina, there could be a much better harvest in 2016-17.An extended and strong El Nino explains why India had a deficient south monsoon and dry winters impacting both Kharif and Rabi crops. As per the data given in Economic Survey, some of the strongest El Nino years were followed by La Nina episodes resulting in bumper harvests. This kind of possibility cannot be ruled out in 2016 as well. La Nina conditions are expected to develop before June- September. So La Nina is unlikely to deliver its full bounty until late in Kharif season.

 

Charts: Economic Survey 2015-16