World

7.5% growth hard, eco activity slow across board

7.5% growth hard, eco activity slow across board

Citing stress in the agricultural sector, farm loan waivers and deflationary impulses as reasons for growing anxiety on the broader economy, the second volume of the Economic Survey for 2016-17 has warned that meeting the upper end of the 6.75-7.5 per cent GDP growth forecast for 2017-18 will be a "challenge".

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.

The Survey, tabled by Finance Minister Arun Jaitley in the Lok Sabha on the last day of the monsoon session, explained that current inflation is running well below the 4 percent target, and suggests that inflation by March 2018 is likely to be below the Reserve Bank of India's (RBI) medium term target of 4 percent. However, going forward, there is scope for monetary easing that will facilitate the economy bounce back quicker.

Sunil Kumar Sinha, Principal Economist, India Ratings and Research said: "Survey correctly cautions about the series of deflationary impulses weighing on the economy due to looming twin balance sheet challenge, declining profitability in the sectors such as power or telecommunication sectors, the launch of the GST and demonetisation".

"The tax base did expand after demonetisation...the full effect of collections will monetise gradually as reported income of new payers grows", the survey said.

In a first of its kind mid-year economic survey, the government highlighted that achieving the upper-end of 6.75-7.5 percent growth will be hard in 2017-18, putting to rest earlier projections that cited a growth rate of 6.75-7.5 percent in the current fiscal. While highlighting the stress areas, the economic report card said that sound macro-economic stability, low inflation and reduction in cash holding in the economy post demonetisation are the positive features of the economy.

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Outlining the benefits of demonetisation, Subramanian said that there were early signs as cash usage in the economy has come down.

However, it indicated that sluggish growth and increasing indebtedness in some sectors of the economy have impacted the asset quality of banks and this is a cause for concern. "The apparent resilience was even more marked in nominal growth magnitudes because both nominal GVA and GDP growth accelerated by over 1 percentage point in 2016-17 compared with 2015-16".

Less developed states such as Bihar, Chhattisgarh, Jharkhand, Rajasthan, West Bengal and Odisha witnessed around 30 per cent rise in mandays worked between November 2016 and March 2017.

The total burden of loan waiver could shoot up to Rs 2.7 lakh crore from the existing 1.25 lakh crore that some states have already announced. "Cyclical conditions, then, suggest that the policy rate should actually be below-not 50-100 basis points or so above-the neutral rate".

On the inflation outlook, Subramanian, however, said our Survey stated that there was considerable scope for further easing in monetary policy as the repo rate was 25-75 basis above the neutral rate.


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