Economic Survey: Corporate debts worrisome, hope hinges on consumer spend and monsoons

The most critical short term challenge facing the Indian economy is the debt of private companies and public sector banks, cautions Economic Survey 2015-16.

Domestic growth, in the short term, will depend on a favourable monsoon, and increased consumer spending, the survey, tabled in the Parliament on Friday by the Union Finance Minister Arun Jaitley, says.

In addition to support to agriculture, the survey also calls for major investments in health and education of people to exploit India's demographic dividend to optimal extent.

Terming the debt problem as the "twin balance sheet problem", the survey considers the impaired financial positions of the public sector banks and some corporate houses as the major impediment to private investment and a full-fledged economic recovery.

The annual stocktaking of Indian economy before the Union Budget called for a multi-pronged approach - that of recognition, recapitalization, resolution and reform - for comprehensive resolution of the challenge. While recognition of the true burden by banks will give the actual magnitude of the problem, recapitalization will safeguard their capital position through infusion of the equity. The term resolution means that the corporate houses should simply resolve their debt problem through sale of assets. Reforms hints at the future plans that needs to be taken to avoid a repetition of the problem.

The survey forecasted a real GDP growth for 2015-16 in the 7 per cent to 7.75 per cent range. Going ahead, the two factors that can boost consumption on the domestic front have been identified as increased spending from higher wages and allowances of government workers if the seventh pay commission is implemented, and the return of normal monsoon. It also adds that increase in wages and benefits recommended by the pay commission are not likely to destabilize prices and will have little impact on inflation.
 
 Among other indicators, the survey states that low inflation has taken hold and confidence in price stability has improved. The Current Account Deficit has declined and foreign exchange reserves have risen to $ 351.5 billion in early February, 2016. The fiscal sector registered these striking successes; ongoing fiscal consolidation, improved indirect tax collection efficiency and an improvement in the quality of spending at all levels of government. The government tax Revenues are expected to be higher than budgeted levels.

Direct taxes grew by 10.7 per cent in the first 9 months of 2015-16 while indirect taxes were also buoyant, it points out.

The survey also states that the aggregate capital expenditure by the government increased by 0.6 per cent in 2015-16. This occurred both in the centre and states, with the former contributing 54 per cent and the latter 46 per cent.

However, the survey has expressed concern over approval of GST Bill being elusive so far, the disinvestment programme falling short of targets and the next stage of subsidy rationalization being a work-in-progress.

According to the survey, the country's long run potential growth rate is still around 8-10 per cent, though realising this is not an easy task as India may have to contend with an unusually challenging and weak external environment.  It suggests that one tail risk scenario that India must plan for is a major currency re-adjustment in Asia in the wake of a similar adjustment in China. Another tail risk scenario could unfold as a consequence of policy actions, to say, capital controls taken to respond to curb outflows from large emerging market countries, which would further moderate the growth.

The survey says that in either case, foreign demand is likely to be weak which requires to find and activate domestic sources of demand to prevent the growth momentum from weakening.