Boosting Agriculture & Strengthening MSMEs Will Steer Growth in Economy: FICCI Survey

The latest round of FICCI's Economic Outlook Survey views that boosting agriculture sector, strengthening MSMEs and undertaking factor market reforms are key to steer the economy out of the slowdown

The latest survey puts forth a quarterly median forecast of 6.0% for GDP growth in the first quarter of 2019-20. The growth numbers for the first quarter are expected to be released by Central Statistics Office (CSO) next week.

Furthermore, the annual median GDP growth forecast for 2019-20 has been pegged at 6.9%,with a minimum and maximum estimate of 6.7% and 7.2% respectively.

While the median growth forecast for agriculture and allied activities has been put at 2.2% for 2019-20; the industry and services sector are expected to grow by 6.9% and 8.0% respectively during the current financial year.

The survey was conducted during the months of June-July 2019 amongst economists belonging to the industry, banking and financial services sectors.

With regard to inflation, the latest official numbers report moderate price levels. The outlook of participating economists on inflation also remains benign. The median forecast for Wholesale Price Index based inflation rate for 2019-20 has been put at 2.9%, with a minimum and maximum estimate of 2.1% and 5.7% respectively.

The Consumer Price Index, on the other hand, has a median forecast of 3.7% for 2019-20 - with a minimum and maximum estimate of 3.4% and 4.1% respectively.

Concerns remain on external front with median current account deficit forecast pegged at 2.3% of GDP for 2019-20. Merchandise exports are expected to grow by 3.6%, while imports are expected to grow by 4.0% during the year. Overall decline in global growth forecasts, escalating trade tensions, uncertainty around Brexit and foggy outlook on international crude oil prices have emerged as key concerns on the external front.

Slower global growth will impact India's growth prospects as well going forward. In fact, economists unanimously indicated that India?s potential growth rate would be in 7.0% to 7.5% range, which is lower than the 8% plus potential growth rate estimated until a few years back.

However, a majority of participants felt that potential GDP growth would settle at the higher end of the range at 7.5%.

The participating economists were sceptical and divided about replicating the previous high growth performance of over 8% and sustaining it at that level. Those who were optimistic believed that a turnaround would be challenging given the current global environment and could take at least three to four years.

On the strategies to achieve India's potential growth rate, the surveyed economists suggested four key areas that needed immediate attention: Boosting Agriculture Sector; Strengthening MSMEs; Undertaking Factor Market Reforms; and Enhancing Avenues for Infrastructure Financing.

The recently released unemployment numbers by NSSO re-affirm the grim situation with regard to employment in the country. The participating economists were asked to indicate areas of improvement that would help create more jobs, particularly in manufacturing and services sectors.

The participating economists identified four key areas of improvement that would help create more jobs: Cost of Doing Business; Regulatory Reforms; Labour Reforms and announcement of Sector Specific Special Packages.

The participating economists opined that it was necessary to ensure availability of capital and access to diversified long-term capital sources for carrying out productive investments in the economy. Economists felt that it was necessary for input and, more importantly, borrowing costs to be lower to drive investments and employment in the country.

Participants also indicated that it was important to carry out structural reforms in the factor markets and the same has been echoed by FICCI time and again. Further reforms in areas of land, labour and capital are needed urgently to enhance competitiveness of the Indian industry.

Furthermore, greater efforts are required to develop the bond market, non-bank financial sector, and the stock exchanges. Economists also felt the need for establishing a long-term development finance institution on a priority basis.

Sharing their outlook on the future course of the monetary policy, participating economists unanimously felt that the Reserve Bank of India will continue with its accommodative stance. Majority of them suggested further cut in the repo rate in the remaining part of fiscal 2019.Economists felt that the prevailing real interest rates were high.

The participants also signalled that tardy deposit growth is haunting the banks as it is limiting their ability to lend and is preventing adequate transmission. Economists suggested that the liquidity situation needs to further improve for ensuring smooth transmission of the cuts in repo rate.

Further, it has been observed that the saving rate in India has declined over the past few years, with the decline being sharper in the household segment.

This is a major concern as household savings form a very important source of funds for investment in the economy. Intermediation of savings into financial assets has also been a challenge. Economists were asked to suggest ways in which financialization of household savings in India could be improved.

Participating economists attributed the dip in net household savings to lower overall incomes in the hands of the consumer on back of slowdown in economic growth. They emphasized the need for enhancing GDP growth and ensuring a more equitable distribution of gains from growth to improve the savings rate.

Economists also underscored the importance of improving penetration of financial products to improve financialization of savings.

While commending the government for opening mass bank accounts under Pradhan Manti Jan Dhan Yojana, participants said they believed that innovative approaches such as focussing on promoting digital banking need to be undertaken more aggressively to bridge the gap in access and usage of bank accounts.

Surveyed economists recommended that financial instruments offered by equity and bond markets should play a major role in diversifying the available saving options.

Furthermore, from a regulatory standpoint; the government bond market, the corporate bond market and the equity market are treated separately in India and the same needs to be corrected.