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Volume-II of the Economic Survey released on Friday painted a mixed picture of the economy suggesting that achieving higher end of the 6.75-7.5 per cent GDP growth would be difficult. But the survey said inflation is expected to remain below the medium-term target of 4 per cent as projected by the RBI and Fiscal Deficit will fall to 3.2 per cent of the GDP in 2017-18 as compared to 3.5 per cent last fiscal. Offering hope that the RBI will ease its monetary policy, the survey called for more interest rate cuts to boost the country’s economy.
According to the survey, the economy has faced a slew of challenges including appreciation of the rupee, farm loan waivers, rising stress on balance sheets in power as well as telecom sector, and transition issues arising from implementing the Goods and Services Tax (GST).
The survey, authored by Chief Economic Adviser Arvind Subramanian, pointed out the concerns about farm loan waivers, saying that these could reduce aggregate demand by as much as 0.7 per cent of the GDP, imparting a significant deflationary shock to the economy. Besides, it warned of fiscal slippages as a series of deflationary impulses are weighing on an economy yet to gather its full momentum.
Hoping for more policy reforms, Subramanian said that the Indian economy has seen an across-the-board deceleration in activity and requires policymakers to come up with all the possible tools to revive growth. “The likely growth this fiscal will be towards the lower end of the 6.75-7.5 per cent band suggested in January-end, mainly because of downside effects of factors like the appreciation of the rupee, farm loan waivers and transitory challenges from implementing the GST and the only upside possibility is exports growth,” Subramanian said after the Economic Survey Volume-II was tabled in Parliament.
With the survey’s release, industry bodies such as CII, FICCI and Assocham hailed steps taken by the Government to resolve the twin balance-sheet problem, but the market shrugged off the move and ended in the red. The risk appetite of domestic as well as international investors took a hit, stock market’s key indices — Sensex and Nifty — fell over 1 per cent to hit their one-month lows on Friday. As a result, the sharp plunge left investors disappointed and made them poorer by over Rs 95,000 crore as the market cap stood at Rs 1,27,08,846 crore.
The Volume-1 of the Economic Survey, tabled in Parliament on January 31, had predicted a range for GDP growth of between 6.75 and 7.5 per cent, factoring in more buoyant exports as global recovery gathered steam, a post-demonetisation catch-up in consumption, and a relaxation of monetary conditions.
Outlining the benefits of demonetisation, Subramanian said that there were early signs as cash usage in the economy has come down. “Has cash come down in the economy? We seem to have achieved a 20 per cent reduction in the equilibrium cash holding which means that the cash-GDP ratio has come down by about 1.6 percentage points and this was one of the objectives of DeMo. It is something quite substantial that has been achieved,” he said.
He further said that 5.4 lakh additional taxpayers were added in the post note ban period between November 8 and March 31.
“It represents about 1 per cent of taxpayers. It led to increase in number of taxpayers. The reported taxable income has not gone up by as much because many of these new filers are reporting a taxable income around the threshold. So whether this increase in taxpayer will lead to increased taxes remains to be seen,” Subramanian said.
Talking about the farm loan wavier issue, which could cut demand in the economy by up to 0.7 per cent of the GDP, Subramanian said, “Farm loan waivers, with total Rs 1.25 lakh crore for States that have already announced such measures, could reach Rs 2.7 lakh crore if all States were to implement it. Such waivers would be deflationary and impact demand by up to Rs 1.14 lakh crore.”
India’s economy grew by 7.1 per cent in the 2016-17 fiscal. Growth slowed to 6.1 per cent in the March quarter, its lowest in more than two years. He said GST receipts, growth outlook, receipts from telecom spectrum and 7th Pay Commission outgo on the Government employees’ salary as downside risks. Upside potential included compliance benefits from the GST and higher denomination currency demonetisation, which has added 5.4 lakh new tax payers and reduced cash by 20 per cent.
The Survey said inflation is expected to remain below the medium-term target of 4 per cent as projected by the Reserve Bank of India (RBI). Fiscal deficit will fall to 3.2 per cent of GDP in 2017-18 as compared to 3.5 per cent last fiscal.
Citing deflationary impulses, it stressed that farm revenues, decline in non-cereal food prices, loan waivers, fiscal tightening and declining profitability in the power and telecom sectors are weighing on the economy. “Economy is yet to gather its full momentum and still away from its potential,” it said.
On the inflation outlook, Subramanian, however, said our Survey stated that there was considerable scope for further easing in monetary policy as the repo rate was 25-75 basis above the neutral rate. The RBI had last week cut its main policy rate by 25 basis points to 6 per cent, the lowest since November 2010. “Cyclical conditions suggest that the policy rate should actually be below. The neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable,” the Survey said.
To prop up agriculture sector, he prescribed remunerative minimum support prices (MSPs) for crops backed by effective procurement. Also, he said, restrictions on stock limits and exports that impede realisation of better prices should be eliminated. “Time is also ripe to consider whether direct support as opposed to indirect support can be more effective,” he added.
A number of indicators — GDP, IIP, credit offtake, investment and capacity utilisation — point to a deceleration in real activity since first quarter of 2016-17 and a further deceleration since the third quarter.
Since February 2017, the rupee has appreciated by about 1.5 per cent. According to the Survey, the structural reform agenda of the Government includes implementing GST, Air India privatisation, rationalisation of energy subsidies and addressing twin balance sheet challenge facing banks.
“There are early signs of tax base expanding post the implementation of GST,” it said. Also, nominal GDP growth has accelerated post demonetisation. The Survey wanted stock limits and movement curbs on farm goods to end and credit off-take from banks to pick up.
As per the Survey, the Government and the RBI have taken prominent steps to address the twin balance sheet challenge which has boosted market confidence in the short run. “The removal of checkposts and easing of transport constraints after GST implementation can provide some short-term fillip to economic activity,” it added.
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