Setting the tone for a bold and reformative Budget, the Economic Survey has projected a robust economic growth of 6.75-7.5 per cent for 2017-18, while calling for “policy support” for an economy recovering from demonetisation.

The Survey clearly sends out the message that it is time to provide the “carrots” for those who faced the demonetisation “stick”. A five-point strategy has been suggested, including cut in personal income tax rates, accelerating the corporate tax reduction roadmap, and widening the tax net.

“Demonetisation has affected different forms of money very differently. It has reduced the supply of cash but has increased the supply of deposits,” said Arvind Subramanian, Chief Economic Adviser to the Finance Ministry, and the chief author of the Survey.

Three downside risks

Tabled by Finance Minister Arun Jaitley in the Lok Sabha on Tuesday, the Survey also points to three downside risks to this GDP forecast: likely spillover of demonetisation effect, rising oil prices, and emerging global protectionism.

It clearly is betting big on export recovery, which could add as much as one percentage point to GDP next year, on the back of an uptick in global economic activity and also given the high elasticity of Indian real export growth to global GDP.

It has been stressed that the effort to collect taxes on newly disclosed (and undisclosed) wealth should not lead to tax harassment by officials at all rungs of the hierarchy.

The Survey also sees “a strong export recovery” having broader spillover effects to investments, although private investments are unlikely to recover significantly from 2016-17 levels. While making a case for higher public investments, it has stressed for balancing the short-term requirements of an economy recovering from demonetisation against medium-term necessity of adhering to fiscal discipline.

Clearly, the Survey is not for loosening the fiscal policy and would want the Budget to adhere to its fiscal consolidation path. Noting that the quantum of fiscal windfall from demonetisation was still “uncertain”, the Survey has suggested that the proceeds be used to strengthen the government’s balance-sheet than for its consumption.

The best use of the windfall would be to create a public sector asset reconstruction company so that the twin balance sheet problem could be addressed, facilitating credit and investment revival, it noted.

If this cannot be pursued, then the windfall can be used towards the compensation fund for the GST that would allow the rates to be lowered and simplified. Another avenue could be debt reduction.

The fiscal gains from implementing GST and demonetisation, while almost certain to occur, will probably take time to be fully realised, the Survey said.

Anis Chakravarty, Lead Economist, Deloitte Haskin & Sells LLP, said the Survey makes an important point about the fact that India’s credit rating should be revised (upwards) given that growth prospects are good and the outlook also remains favourable.

Reacting to the Survey, Congress said wrong policies of the Centre have created distress for the rural population. The Left said by not gathering the data after demonetisation, the Centre failed to capture the clear picture of the economy.

The parties also alleged that the Survey does not reflect the issues such as unemployment, crisis in agriculture and manufacturing sector and the lack of impetus in the infrastructural growth. They added that the Centre failed to utilise the benefits of decrease in global crude oil prices.

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