27/02/2015 5:44 PM IST | Updated 15/07/2016 8:25 AM IST

Economic Survey's 8.5% Growth Number Is Simply Not Believable

Bloomberg via Getty Images
Glassmiths use punties to gather molten glass from the furnace at the Kohinoor Bangle Industries factory in Ferozabad, Uttar Pradesh, India, on Saturday, Feb. 21, 2015. Prime Minister Narendra Modi wants India's companies to embrace their homeland as a manufacturing base. As part of a policy initiative called 'Make in India,' Modi plans to raise the share of manufacturing in the economy to 25 percent by 2022 from 18 percent now. Photographer: Udit Kulshrestha/Bloomberg via Getty Images

The Economic Survey was released by the ministry of finance earlier in the day today. Among other things, the Survey forecasts that the economic growth during 2015-2016 (period between April 1, 2015 and March 31, 2016) will be between 8.1-8.5%.

The survey lists a number of reasons to back this forecast: "In the short run, growth will receive a boost from lower oil prices, from likely monetary policy easing facilitated by lower inflation and lower inflationary expectations, and forecasts of a normal monsoon."

In simple English, lower oil prices, lower interest rates, lower inflation and a normal monsoon will lead to higher growth. If only things were as simple as that. A lot of other data highlighted in the Economic Survey shows that all is not well with the Indian economy and a growth of greater than 8% will be very difficult to achieve.

Let's start with stalled projects. The Economic Survey defines stalling of projects as a "a term synonymous with large economic undertakings in infrastructure, manufacturing, mining, power, etc".

It further states: "The stock of stalled projects at the end of December 2014 stood at Rs8.8 lakh crore or 7 percent of GDP." The overall stalling rate as of December 2014 was at 10.3%. For the private sector, the number stood at 16%.

What this means is that for every Rs100 worth of projects under implementation, Rs 16 worth of projects have been stalled for the private sector.

While the rate of stalled projects has fallen slightly in the recent past, it still remains very high in comparison to the 2-4% rate between 2006 and 2008.

This is a clear indicator of the fact that many new projects remain non-starters. And if new projects don't start, how will jobs be created for more than a million Indian youth that are entering the workforce every month? And what is the point of economic growth without new jobs being created?

Over and above this, the Indian corporations remain heavily leveraged. They have borrowed much more than they can possibly repay. As the Mid-Year Economic Analysis released by the ministry of finance in December 2014 pointed out: "Over-indebtedness in the corporate sector with median debt-equity ratios at 70% is amongst the highest in the world. The ripples from the corporate sector have extended to the banking sector where restructured assets are estimated at about 11-12 percent of total assets." The Economic Survey also makes a similar point. And given this, banks are in no mood to lend. If banks are not in the mood to lend, how will projects start?

Further, many years of inflation has eroded household savings. Data from the Economic Survey shows that household savings (both physical and financial) have collapsed from 25.2% of the GDP in 2009-2010 to 17.8% of the GDP in 2013-2014. This is a huge collapse.

Household financial savings have collapsed from 12% of the GDP to 7.2% of the GDP. Inflation has only recently been brought under control. And chances are that people will now try and increase their savings, and consumer spending might still not pick up as it is expected to.

real estate india

The real estate sector remains down in the dumps. In fact, real estate prices have gone up dramatically over the years, making homes largely unaffordable. As the Economic Survey points out: "House prices have increased over the years in many cities and towns as per the National Housing Bank's RESIDEX index of residential prices in India." This has led to a "widening gap between demand and supply of housing units and affordable housing finance solutions is a major policy concern for India."

So, even if the Reserve Bank of India were to cut the repo rate (or the rate at which it lends to banks) and banks were to pass on that cut to the consumers, people will still not take on home loans and buy homes. This, for the simple reason that homes are simply too expensive. A well-performing housing sector has a huge impact on economic growth.

Over and above this, there is a lot of other high-frequency data which tells us that an economic growth of 8.1-8.5% will not be possible. For the period October to December 2014, corporate profits on the whole fell. Car sales, which are an excellent economic indicator, remain muted and are only expected to go up by 3-5% during this financial year. Lending by banks is much slower than it has been over the past few years. Exports during the course of this financial year have gone up by only 2.44% to $258.72 billion.

The indirect tax collections have risen by 7.4% during this financial year. When the budget was presented in July 2014, it was expected that indirect taxes would grow by 20.3%.

What all this tells us very clearly is that the Economic Survey's forecast of 8.1-8.5% economic growth for 2015-16, is very difficult to believe.

Finance Ministers Since Independence

More On This Topic