Fiscal Targets Need More Correction With Nominal GDP Becoming Smaller: Interview

 Chennai: The nominal GDP estimate of FY26 has come down to Rs. 345 lakh crore in the revised series compared to the Rs. 357 lakh crore in the old series. With this, the fiscal deficit will need 20 bps correction to achieve its annual target and debt-to-GDP ratio will need two percentage points additional consolidation, says Aditi Nayar, Chief Economist, ICRA in an interview with Financial Chronicle.

Q) As per the revised series, the nominal GDP of the country has shrunk compared to the estimate in the old series. Which are the sectors and components that have contributed to this shrinkage?

Sure, you know when we look at the GVA side, the gross value added side, we basically have seen lower estimates now for two major sectors of the services sector, which is the trade hotel transport, communication, etc. and the public administration, defence and other services. So THTCS, the first one, here we've seen the sharpest downward revision and that is followed by the public administration, defence and other services. Within industry, we've seen a 4 to 5 % reduction in size of construction and electricity as well.

As far as the expenditure side estimates are concerned, the biggest correction actually has been made in the size of the private final consumption expenditure. And the pace of growth has also now moderated as compared to the average of around 7 % that was coming through for the last few years, which had seemed to be at odds particularly with the kind of commentary that we were getting from the consumer goods companies.

Q) When you compare the old series, the share of government final consumption expenditure exports and imports are up in FY 26. But even the share of these components has been coming down from FY 23 in the revised series. Can you throw some light on this?

It's because the other sectors, the ones that you haven't mentioned, are growing faster than these sectors. So it's just a matter of which sectors grow the fastest. Even if you see a correction in the base year numbers, the sectors which grow faster subsequently will see their shares going up. So it's just mathematical.

Q) The discrepancy levels have increased from 0.7 % in the old estimate to 1.5 % in the revised estimate for FY26. If I'm right, the inclusion of more data sets should have brought down the discrepancies. How did this happen?

See, I don't think you should actually compare discrepancies across the first and the second advance estimates because the base years are different. When you look at the new base year, the initial year, the discrepancies are zero. And in the subsequent years, they are there. But what we expect is that as more data comes in, as the quarterly numbers end up getting revised, the discrepancy number should shrink quite significantly in the new series as well.

Q) Do you think in the coming series we should include more data sets into the revision of GDP series?

The new series is built on new data sets and new surveys that were not there in the past. So they are going to provide richer information about a larger part of the Indian economy and there'll be basically less proxies that you're using. So hopefully with the use of these new data sets, there will be less revisions in the annual numbers going ahead. On a quarterly basis, I suspect we may still see revisions because many of the surveys that are used for the GST estimation are actually annual surveys, they are not quarterly surveys. So, when we do the quarterly data estimation, there is a quarterization of annual information, which may not always be very accurate, especially in a gap of just two months after the quarter is ending. So, while we do think that quarterly revisions may continue, hopefully the annual revisions, the degree of those will go down in the new series.

Q) In your opinion, are there any other data sets which need to be included in the revision in the coming revisions?

No, I think as of now, you know, we've done quite a lot. We've moved quite a long way. First of all, the old series was really, really very old. And from that, moving to a much more updated series, we should have much richer and much more accurate information about the actual state of the Indian economy. It's similar to what we've seen on the CPI side that a lot of obsolete items have been removed and we're capturing a price movement of stuff that we actually use, what we produce and what we buy these days.

So it's a significant improvement. We can argue that even on the CPI side, we should be collecting the data even more frequently. But at least we move to a frame and new weights, which are much more accurately representing what is produced and purchased in the Indian economy.

Q) The shares of primary and secondary sectors have reduced while that of tertiary sector has moved up. What does this say about the growth in sectors like agriculture and manufacturing?

Basically the services sector still is growing faster than the other two sectors which was the case in the old series as well. So it's really not surprising that you know this is the case. However, I think when we've done the reset the share of the services sector is lower than what it was in the earlier series. But because it's growing faster than the other two, its share is increasing in the new series as well. So that is what we would have expected at the current stage of India's development. It is the services sector that is growing faster than the other two sectors.

Q) What about agriculture and manufacturing, are they actually growing slower or maybe lesser than what is desired?

See agriculture, mean, you know, there will be a limit to what kind of growth we can have. We have seen the area sown going up quite steadily in the last couple of years after COVID. And here, the vagaries of the monsoon, cetera, crop damage, crop loss, there are so many factors to contend with. So we cannot really expect that agriculture is going to grow significantly faster than what we have seen in the recent past.

And manufacturing, particularly the recent period, we've seen very heavy, very healthy growth, particularly after GST. And I think, you know, that impact will probably continue for some more time. Our view is that even after the first flush of consumer durables, growth may peter out. It will be consumer non-durables, which will see a sustained growth after the GST rationalization. And then in FY28, we are anticipating the pay revision and that should then again give another boost to consumer durables after that.

Q) What impact will the revision have on our fiscal targets and budgetary allocations?

Mathematically now that the nominal GDP base is smaller than what had been penciled in at the time of the budget, the fiscal deficit to GDP ratio and the to GDP ratio are a little bit higher than what the budget had penciled in. And that means that they'll have to have slightly tighter fiscal consolidation over the course of the year. And the debt to GDP target needs a slightly steeper correction to go into the medium term target of 50 plus minus 1 % in the next few years.

Q) So what will the government do about it? They will go ahead with this kind of targets or probably they will also revise it in the revised estimate?

Yeah, we'll have to really wait and watch and see how the revenue situation unfolds over the course of the year and what happens to expenditure. So the fiscal deficit itself is less than 20 bps of a correction which needs to be made to come down to 4.3 % of GDP. It will also depend on what the nominal GDP growth for FY27 turns out to be. We've taken a number slightly higher than 10%. So if nominal GDP grows faster, then that can possibly take care of some of the additional fiscal consolidation which is required. But on the debt to GDP side, there it's a matter of like two percentage points additional of consolidation which would be required by FY 2030-31. So there I think we'll have to wait and see what the government suggests.

The gross market borrowing number for FY27 is likely to be lower than what had been penciled into the budget.

Q) In that case, will the allocations be lower than what has been estimated in the budget for different sectors?

The expenditure allocations will remain what they are in the budget but the government may choose to make some changes over the course of the year or to make sure that the fiscal deficit is actually restricted to 4.3 % of GDP.

Q) With the GDP shrinking and the rupee also remaining weak, will we reach the $4 trillion target in FY27?

I don't think we should say GDP is shrinking because that would mean that we are in a contractionary phase. That's not the case. An updated estimate has revealed that the size of the economy is smaller than what we were projecting, what we were estimating earlier. Now, there will be growth in nominal GDP in the current year. We're expecting it to be a double-digit nominal GDP growth. And even if we build in some rupee depreciation in FY27, I do think we'll cross the $4 trillion mark in FY20.

Q) The GDP growth rate has improved in the new series, as we have been discussing about this now. But that growth has come from a low base, if I'm right. When we are already the fastest growing large economy, how does this faster growth benefit the country as such?

First of all is validation that we are still growing very fast, even though the size is a little smaller than what we were estimating earlier. I think, you know, it's great validation that we are a very high growth economy. Beyond that, you know, sustaining this growth, improving it over the medium term, that's really what will benefit per capita incomes over a period of time. So that's what we are hoping will be the case.

Q) So our viewers would probably want to know, like, they hear about words like GDP and, you know, the fiscal target and all. So when it comes to GDP as such, what should the common man take from it? Like, what will be the benefit for the common man if we are growing at a faster pace?

If we are growing at a faster pace, hopefully it will translate into faster growth in wages, faster growth in incomes and overall better living conditions over a period of time.