The Economic Survey is a comprehensive and insightful document that takes weeks to prepare and days to absorb. Nevertheless, my very quick take on the Survey for 2016-17 is as follows. Its consternation with rating agencies notwithstanding, the document offers some pragmatic insights and prudent advice. For instance, the Survey acknowledges the loss of income and employment in the informal sectors after the note ban.
Moreover, the Survey highlights that the pain felt by the informal sectors may not be adequately captured by the official GDP growth estimates, given the manner of estimation, which is based on the available data for the less-affected formal sectors.
It estimates the effect of demonetisation on GDP growth, at 0.25% to 0.5% below the baseline estimate of 7.0%. The resultant growth forecast range of 6.5-6.75% for FY2017 appears reasonable, in line with ICRA’s estimates of 6.6% GVA growth and 6.8% GDP growth, and predictably lower than the advance estimates released previously by the Central Statistical Office, that were constrained by data availability.
In another area of sagacity, the Survey accepts that private investment in FY2018 is unlikely to display a significant recovery compared to the levels in FY2017, which have been rather anaemic.
Moreover, instead of recommending higher spending as the panacea to this challenge, the document reminds the reader of the need to actually achieve fiscal consolidation, and, somewhat curiously, also optically appear to be adhering to fiscal discipline.
In light of headwinds such as the weak investment cycle and rising oil prices, the Survey forecasts real GDP growth in FY2018 at 6.75-7.5%. It, therefore, expects the pickup in growth in FY2018 to be in a rather wide range of 0 to 100 bps; at ICRA, our baseline expectation is that GDP and GVA growth would improve by 40 bps in FY2018 relative to FY2017.
While the Economic Survey does allude to the potential windfall from the notes not returned to the Reserve Bank of India (RBI) and taxes collected under the Pradhan Mantri Garib Kalyan Yojana, it cautions that such flows would be one-off in nature and that their magnitude is unclear at present.
The document is authored by the chief economic advisor, who also chaired the committee that wrote the report on the revenue neutral rate and structure of rates for the GST.
Unsurprisingly, the survey cautions the readers regarding the complications during the changeover to the GST, emphasizing that the fiscal benefits to the government from the GST as well as the note ban would not be visible immediately.
Moreover, given the commitment to compensating the states for any revenue shortfall in the transition to GST, the Survey prudently suggests that the outlook for the Centre’s own revenue collections must be cautious.
With the Economic Survey emphasizing that the rise in crude oil prices would limit the scope for further monetary easing, it underscores that the inflation target notified by the government is headline CPI inflation and not core inflation stripped of food and fuel prices.
In ICRA’s view, the scope for further reducing the repo rate appears to be limited to 25 bps, the timing of which will certainly take a cue from the RBI’s own assessment of the impact of the note ban on economic activity as well as the size and the quality of the fiscal deficit to be revealed in the Union Budget for FY2018.