The second volume of the Economic Survey 2016-17 unveiled on Friday highlighted a “deflationary bias to activity” since its initial version which came out six month ago due to “several new factors” and cut the forecast of real GDP growth in 2017-18 to the lower end of the 6.75-7.5% range formulated earlier.
Since the February edition, the real policy rate had been tighter than anticipated, the survey said, citing it as a reason for the revised growth outlook. There is, it noted, sizeable slack in the economy; for instance, the average capacity utilisation was just 72.7% in the third quarter of last fiscal year.
Even as chief economic adviser Arvind Subramanian spoke of “across-the-board deceleration”, the survey iterated the need for “considerable” monetary easing in order to deleverage corporate balance sheets. While the authors of the survey are patently critical of the Reserve Bank of India for keeping the policy rates at levels that felt higher than warranted, they also rebutted the government’s claims of tax buoyancy and identified new short-term risks to Centre’s fiscal outlook.
These are some of the key points in the survey: Investment spending of the general government — which improved on the back of CPSEs last fiscal — is likely to decline relative to GDP this year as farm loan waivers shrank states’ fiscal space and the Centre struck a balance between counter-cyclical policy and the need to maintain fiscal credibility; short-term impact of farm loan waivers is likely to be deflationary; more downside risk to fiscal outlook than envisaged in the Budget due to reduced tax revenue from slower nominal GDP growth, reduced GST collections owing to lower-than-earlier tax rates/transitional challenges and lower spectrum receipts due to the structural (RJio) jolt to the viability of telcos.
Declining profitability in power and telecom, which threatens to add to the twin balance sheet problem, the farm-sector stress and real exchange rate appreciation have all posed risks to growth.
Stating that both the expected inflation and the GDP are subdued relative to their equilibrium levels, the survey said with a structural shift in underlying inflation dynamics, along with the fact that the current inflation is running below the 4% target, suggested that inflation by March 2018 could stay below 4%.
According to India Ratings, the survey failed to provide an answer to “the burning question that despite growing macroeconomic stability and various policy initiatives taken by the government, how long will it take for India’s GDP growth to realize its potential?” It added: “Also the narrative still has not moved away from policy rate cut to admitting that fixing the problem of real sectors is equally important as investment revival is not a one way street.”
The survey said: “The earlier the (monetary) easing, complemented with other reform actions, especially to address the twin balance sheet challenge, the quicker the economy can achieve its full potential.” While commending the policy initiatives like the goods and services tax and bankruptcy code, the survey said that all impediments that come in the way of realising better prices for farmers — stock limits, export curbs, issues related to implementation of national agriculture market — should be removed.
DK Srivastava, chief policy adviser, EY India, said: “The mid-term review’s admission of a growth slowdown from the pre-budget Economic Survey projection of an average growth exceeding 7% is candid and realistic. Apart from two consecutive although short-term impacts emanating from demonetisation and the GST, the economy continues to suffer from deficient investment and export demand, appreciating rupee, macro implications from farm loan waivers in addition to sectoral problems in the power and telecommunication sectors. These are expected to weigh down India’s growth pulse in the short-run. We should reach closer to our potential growth exceeding 7.5% in FY19.”