A fuzzy outlook

The Economic Survey 2016-17 — which takes a cautious, candid and at times intriguing view on the state of the economy — has three standout features. First, it indicates that the impact of demonetisation (demand shock, supply shock and uncertainty shock) cannot be clearly ascertained, and has played safe on estimating next year’s growth rate, pegging it at 6.75-7.5 per cent. Second, it makes a surprisingly firm case for fiscal consolidation, in contrast to its avatar last year, despite conceding the demand compression post-demonetisation. Finally, it floats the idea of a ‘universal basic income’ by implicitly suggesting that existing welfare schemes can be whittled down or done away with. Unless the Budget today deviates from the Survey’s approach (given the post-demonetisation scenario, that’s possible), it appears that a fiscal deficit of between 3-3.5 per cent for 2017-18 is on the cards, based on a nominal growth rate of about 11-12 per cent. In absolute terms, the fiscal deficit may be budgeted at close to the current level of ₹5.3 lakh crore, in the event of a lower growth rate and uncertainty on revenue projections, giving cause for markets to cheer. Unlike the last Survey, which laid out a cogent framework of development and welfare, elaborating on the ‘JAM (Jan Dhan-Aadhaar, Mobile) trinity’, this document lacks a unifying thread, even as it makes observations across subjects — perhaps reflecting the state of flux both in the domestic economy and a post-Trump world order. Curiously enough, it makes a case for export-led growth, with an emphasis on garments, even as protectionism is on the rise. Whether this amounts to an implicit suggestion to let the rupee and interest rates slide is a moot point.

The Survey’s take on growth is not exactly upbeat. It relies on IMF projections, which are not the most reliable, to say that exports may drive growth in 2017-18 on the back of a recovery in world growth from 3.1 per cent in 2016 to 3.6 per cent in 2017. A “catch up after demonetisation-induced reduction” and lower lending rates by as much as “75-100 basis points” (a surprising forecast in view of post-Trump uncertainties), besides good farm output this year, are expected to spur spending on housing and consumer goods. However, higher oil prices, by 10-15 per cent in 2017 over 2016, are expected to act a drag of about 0.5 percentage points, while private investment is unlikely to pick up in view of debt-ridden balance sheets. It rather intriguingly observes: “Some of this weakness could be offset through higher public investment, but that would depend on the stance of fiscal policy next year.”

On demonetisation, however, the Survey has candidly said that no efforts should be spared in restoring cash to the levels demanded by the public; efforts to stop short by jumpstarting a shift to cashless transactions could prove counterproductive, it warns. In sum, it is a document that is rich in detail but intriguing in parts, from which it’s not easy to derive policy conclusions.

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