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Informist, Monday, Feb. 10, 2025

 

--CEA Nageswaran: See FY26 GDP growth closer to upper band of 6.3-6.8%

--CONTEXT: CEA Nageswaran's comments in an interview with Informist

--CEA: FY26 GDP growth may be near 6.8% on income tax cut, RBI rate cut

--CEA: Econ Survey growth projection did not take into account rate cut

--CEA: RBI's liquidity actions to provide big boost to GDP growth

--CEA: Income tax cut to have sizeable impact on FY26 pvt consumption 
 

By Krity Ambey and Sagar Sen

 

NEW DELHI – The government's proposal to cut income tax rates and monetary policy easing by the Reserve Bank of India together are likely to lift India's GDP growth in 2025-26 (Apr-Mar) closer to the upper band of the 6.3-6.8% range projected in the Economic Survey, Chief Economic Adviser to the Government V. Anantha Nageswaran said.

 

"When we wrote the Economic Survey, we didn't have any particular pre-conceived notion about where (monetary) policy would be," Nageswaran said in an interview with Informist. "The RBI has pencilled in a growth estimate of 6.7%, which is towards the latter half of the range we have, and that's what we also see." But rate cuts normally show an impact with a lag, so it is difficult to quantify an estimate of the impact on GDP growth, Nageswaran said.

 

The RBI's Monetary Policy Committee on Friday unanimously decided to reduce the policy repo rate by 25 basis points to 6.25%, the first cut in nearly five years. The panel also unanimously voted to retain the policy stance at 'neutral'. 

 

"The Budget itself enhances the possibility of growth outcome being towards the latter half of the growth range that we gave," Nageswaran said, referring to the proposal in the Budget to fully exempt those with income up to INR 1.2 million from income tax. The government has also proposed restructuring the income slabs under the new regime, providing benefits of up to INR 110,000 per year. 

 

Nageswaran is hopeful that the RBI's actions on easing liquidity conditions in the banking system would also have a sizeable positive impact on growth. To address the liquidity crunch in the banking system, the central bank on Jan. 27 announced a slew of liquidity measures worth about INR 1.5 trillion, including buying government securities in market operation auctions, variable rate repo auction, and dollar/rupee buy/sell swap auction.

 

BUDGET BOOST

"Mainly I am more optimistic about the optics effect and cash-flow effect coming from the tax cuts for the middle class," Nageswaran said. India's private final consumption is likely to get a strong impetus from the income tax cut, Nageswaran said. There have been concerns over private final consumption after it slumped to a three-year low of 4.0% in FY24. This year as well, after an underwhelming corporate sector performance, private final consumption cooled to 6.0% in Jul-Sept from 7.4% in Apr-Jun.  

 

Another advantage of the tax cut is that the higher demand would nudge the private sector towards capital expenditure, the chief economic adviser said. "I wouldn't say that private sector capital formation was not happening. It is just that the pace at which we wanted it to happen wasn't materialising for various reasons - one of the reasons was the demand visibility," he said.

 

The government has been trying to encourage private capital expenditure for the last few years. After the COVID-19 pandemic, the government tripled its capital expenditure in a bid to crowd in the private sector. The Budget has projected a capital expenditure of INR 11.21 trillion in FY26.

 

"What this tax cut does is, it puts disposable income in the hands of the households, leading to higher demand visibility, leading to capital formation, which leads to hiring. So that is how a virtuous circle is set in motion," Nageswaran said.

 

GROWTH GOALS 

There must be a constant attempt to take the potential growth rate to higher levels to realise the economic aspirations of becoming a 'Viksit Bharat', Nageswaran said, adding that average growth of 8.0% is indeed ambitious. The Economic Survey said India needs to achieve a growth rate of around 8.0%, on average, for about a decade or two, to become a developed economy by 2047.

 

With a growth expectation of 6.4% in the current fiscal, and close to 6.8% in FY26, it essentially means that India needs to grow at a far higher rate in some years over the next two decades. "Desirability and aspirational growth numbers are different from growth numbers that are feasible given the context," Nageswaran said. "It's not that easy to be able to grow at 8.0% at a time when everybody else is growing at 2.0%. So we cannot take these numbers out of context."

 

In the coming years, the global GDP is likely to remain below the average 3.7% seen during 2000 and 2019. The International Monetary Fund has projected a growth of 3.3% in both 2025 and 2026. The World Bank has also projected the global economy to expand by a mere 2.7% in both 2025 and 2026, the same pace as in 2024.

 

"It (8.0% average GDP growth) is something that we should strive for," the top government economist said. "But it is a realistic statement to say, ultimately, outcomes are influenced by many factors beyond our control, including climate change, global conflicts and global growth etc."  End 

 

Edited by Saji George Titus

 

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