Second volume of Economic Survey says growth may not be in 6.75-7.5% range

The Finance Minister Arun Jaitley on Friday tabled in the Lok Sabha the second volume of the Economic Survey for 2016-17.

The second volume, among other things, contains updated macroeconomic data.

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The Survey has come out with a pessimistic view on growth forecast with downward risk to the earlier estimated growth range of 6.75-7.5 per cent GDP growth for 2017-18.

The second volume expects CPI inflation to be below 4 per cent by March this fiscal.

"Growth is expected to undershoot the earlier range and this is what the Survey indicates," said an economy watcher in his initial reactions.

The second volume of the Economic Survey has also noted that the Reserve Bank of India had overestimated the consumer price index (CPI)-based inflation by above 100 basis points in six of 14 quarters. Also, the current repo rates are 25-75 basis points above neutral rates, indicating that there is room for further reduction in repo rates.

On oil prices, the second volume has noted that geopolitics is not as big a risk for oil prices as before.

The Economic Survey has also highlighted that deflationary impulses are weighing on the economy.

Challenges

Its list of challenges included appreciation of the rupee, farm loan waivers, rising stress on balance sheets in power as well as telecom and transition issues arising from implementing the Goods and Services Tax (GST).

The Survey warned of fiscal slippages as “a series of deflationary impulses are weighing on an economy yet to gather its full momentum“.

The Survey said farm loan waiver could cut economy demand by up to 0.7 per cent of GDP.

It saw farm loan waivers by states touching Rs 2.7 lakh crore.

It said inflation is expected to remain below the Reserve Bank of India’s medium-term target of 4 per cent, through the fiscal deficit will be 3.2 per cent of GDP in 2017-18 as compared to 3.5 per cent last fiscal.

Scope for easing in monetary policy

The mid-year survey of the economy said 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,” it said.

The Survey stressed that farm revenues, decline in non—cereal food prices, farm 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.

It further said 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.

The Part—1 of the Survey tabled in Parliament on January 31 had “predicted a range for GDP growth of between 6.75 and 75 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“.

”...the balance of risks seem to have shifted to the downside. The balance of probabilities has changed accordingly, with outcomes closer to the upper end having much less weight than previously,” it said.

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.

Signs of tax base widening

There are early signs of tax base expanding post the implementation of GST, it said. Also, nominal GDP growth has accelerated post demonetisation.

Stating that demonetisation may continue to pay dividends over time, it said about 5.4 lakh new tax payers have joined the tax net post note ban.

The Survey wanted stock limits and movement curbs on farm goods to end and credit off—take from banks to pick up.

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, it said.

Also, it added that the removal of checkposts and easing of transport constraints after GST implementation can provide some short—term fillip to economic activity.

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