Economic Survey 2016-2017 gives the first official estimate of post-demonetisation growth in FY17 in the range of 6.5% to 6.75%. It shows conviction that this is not sufficient cause for introducing deficit-financed fiscal stimulus in FY18 by relaxing the fiscal deficit target of 3% slated for next year.
In line with this, the Economy Survey observes that fiscal policy needs to balance the cyclical imperatives with medium-term issues relating to prudence and credibility.
It does recognise the pressure of increased outflow of salaries and pensions in the wake of the recommendations of the Seventh Pay Commission accompanied by some unanticipated erosion of excise duty revenues in FY17.
The Survey also recognises that the state finances are under stress with their consolidated fiscal deficit going up from 2.5% of the GDP in 2014-15 to 3.6% of the GDP in 2015-16, partly because of UDAY scheme.
The Survey argues in favour of fiscal prudence in spite of the economic slowdown which has caused growth to slide much below its potential level, assessed to be in the range of 8-10%.
The report also observes that the room for monetary stimulus may be limited since domestic prices are expected to come under pressure due to increased prices of global crude and other primary articles. In view of these reasons, the Survey is somewhat ambivalent about India’s growth prospects in FY18, providing a wide range from 6.75 to 7.5%.
While supporting the demonetisation initiative, the Survey cautions that normalisation may spill over into the next financial year and the consumption contraction induced by it may linger on well into the next fiscal.
The Indian economy is also grappling with potent risks emanating from global forces:
First, there is the possibility of eruption of trade tensions among the major countries affecting India’s exports. Second, there could be competition among major players in lowering corporate tax rates to attract capital. Third, with the US incrementally uplifting the Fed rate, there would be steady pressure on the Indian rupee.
Despite these risks to growth, there is an expectation of a slow but steady increase in the tax-GDP ratio. This would be facilitated by the combined effect of GST and digitisation of transactions.
Until a tangible increase in the tax-GDP ratio occurs, the ambitious Universal Basic Income proposal of the Survey will have to wait as it requires the fulfilment of some of the prerequisite conditions.
Two conditions that the Survey stipulates are: (a) full coverage of Jan Dhan, Aadhaar and Mobile connectivity; (b) the need for Centre-state negotiations as part of the UBI would need to be funded by states.
On the whole, the Survey appears to be fixated on the distant long term. The short-term policy responses needed to cope with the immediate challenges have been given lesser importance. But sacrificing the short term may eventually also erode the long-term prospects.
For India, currently placed in a sweet spot in terms of its unfolding demographic dividend, that sacrifice may not be called for.