Dark clouds loom over India’s high-growth dream


New Delhi- Across-the-board deceleration in economic activity has made it difficult to get to the 7.5 per cent GDP growth as projected earlier for the current fiscal, Economic Survey said today as it called for more interest rate cuts and use of all policy tools to revive momentum.

Flagging uncertain fiscal outlook for 2017-18, it listed a number of challenges facing the economy — 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).

Tabled in Parliament, the Survey — which is the second part of the one brought out in January-end and carries the mid-year review, warned of fiscal slippages as “a series of deflationary impulses are weighing on an economy yet to gather its full momentum”.

One among them is farm loan wavier, which could cut demand in the economy by up to 0.7 per cent of GDP.

Farm loan waivers, which total Rs 1.25 lakh crore for states that have already announced such measures, could reach Rs 2.7 lakh crore if all states were to implement it.

Such waivers would be deflationary and impact demand by up to Rs 1.14 lakh crore.

“There has been an across-the-board deceleration” in real economic activity since the first and second quarter of last year, said Chief Economic Adviser Arvind Subramanian, the author of the Survey.

“It is less likely than before that we will reach the upper end” of the 6.75 to 7.5 per cent growth forecast for the fiscal year to March 2018, he said a media briefing.

India’s economy grew by 7.1 per cent in the 2016-17 fiscal. Growth slowed to 6.1 per cent in the March quarter, its lowest in more than two years.

He listed GST receipts, growth outlook, receipts from telecom spectrum and 7th Pay Commission outgo on government employees salary as downside risks.

Upside potential included compliance benefits from the GST and higher denomination currency demonetisation, which has added 5.4 lakh new tax payers and reduced cash by 20 per cent.

He said structural decline in inflation and inflation outlook create scope for lower interest rates.

His 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.

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.

To prop up agriculture sector, he prescribed remunerative minimum support prices (MSPs) for crops backed by effective procurement.

Also, he said, restrictions on stock limits and exports that impede realisation of better prices should be eliminated.

Time is also ripe to consider whether direct support (as opposed to indirect support) can be more effective, he added.

The Survey said inflation is expected to remain below the Reserve Bank of India’s medium-term target of 4 per cent.

Fiscal deficit will fall to 3.2 per cent of GDP in 2017-18 as compared to 3.5 per cent last fiscal.

Citing deflationary impulses, it stressed that farm revenues, decline in non-cereal food prices, 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.

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 second part, however, said: “…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.”

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.

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

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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