Enlisting stressed farm revenues, farm loan waivers and a series of deflationary impulses as reasons for anxiety for the economy, part two of the Economic Survey for 2016-17 said that meeting the upper end of the 6.75-7.5 per cent GDP growth forecast for 2017-18 will be a challenge. The Survey said the forecast for GDP reflects “greater risks to the downside”. The Survey, which was tabled by the government in Parliament on Friday, raises concerns about farm loan waivers saying that they could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock to the economy.
“The Economic Survey cautions that anxiety reigns because a series of deflationary impulses are weighing on an economy, yet to gather its full momentum and still away from its potential. These include: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power and telecommunication sectors, further exacerbating the TBS (twin balance sheet) problem,” the Survey said. Also Read: Achieving high-end of 6.75-7.5% growth difficult: Economic Survey
The Economic Survey also highlights the fact that there has been significant moderation in CPI headline inflation during the last three years and that the current inflation is running well below the 4 percent target, suggesting that inflation by March 2018 is likely to be below the RBI’s medium term target of 4 per cent. The Survey points to scope of further monetary easing by the RBI. “Current inflation, at 1.5 percent, is running well below the 4 percent target, with the domestic economy lacking the dynamism to push this back toward the target,” the Survey said.
“Cyclical conditions, then, suggest that the policy rate should actually be below—not 50-100 basis points or so above—the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, more than that suggested by comparison with neutral interest rates,” it added.
The Survey, however, noted that various factors such as launch of the GST, positive impacts of demonetisation, in-principle decision to privatize Air India along with further rationalisation of energy subsidies and actions to address the Twin Balance Sheet (TBS) challenge contribute to optimism in the economy. Also, a series of government and RBI actions and because of structural changes in the oil market have reduced the risk of sustained price increases, it said.
“The GST is expected, on balance, to reduce prices because of the lower incidence of taxation compared to the combined incidence of central and state taxes previously,” it said.
On the government finances front, the Survey said that fiscal deficit is expected to decline to 3.2 per cent of GDP in 2017-18 compared with 3.5 per cent in 2016-17. “The fiscal deficit target of 3 per cent of GDP under the FRBM framework is projected to be achieved in 2018-19,” it said.
It, however, said that the fiscal outlook for this year is “uncertain’. Downside risks include reduced tax revenues from slower nominal growth than anticipated; reduced GST collections on account of the lower GST rates compared with the pre-GST taxes, and transitional challenges from GST implementation; reduced spectrum receipts on account of the structural jolt to the viability of incumbent firms; and higher expenditures from the 7th Pay Commission estimated at Rs. 30,000 crore.
There is also upside potential to revenues both from the compliance benefits of the GST and the compliance possibilities opened up by demonetisation, it added.