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Economic survey gets realistic on growth

Says state finance to face pressure from farm debt waivers

Indivjal Dhasmana  |  New Delhi 

Chief Economic Advisor Arvind Subramanian. Photo: Dalip Kumar
Chief Economic Advisor Arvind Subramanian. Photo: Dalip Kumar

After more data were out on the health of the economy, the economic advisers in the finance ministry now realised that clocking 7.5 per cent growth may be a difficult task for the current financial year.

Not that, they were very sure of this target when volume I of the Economic Survey was released in January this year. What they had projected was a wide range of 6.75-7.5 per cent. So, they had forecast both lower than 7.1 per cent growth, achieved in 2016-17, as well as higher than that, not sure of how twin balance sheet problem will pan out.

However, now they are more firm that risks to the upper range have increased.

The (IMF) and the World Bank have already projected India's economy to grow 7.2 per cent, a tad higher than last year's.

The survey, authored by chief economic advisor Arvind Subramanian and his team, says 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."

The numbers to be released by this month-end would give some indication of growth figures for FY'18.The second quarter would witness dampening impact from implementation, which is already evident from purchasing managers' index numbers.

Besides, transition issues of implementation, the Survey lists out other challenges as — appreciation of the rupee, farm loan waivers, rising stress on balance sheets in power as well as telecom.

It says a number of indicators — GDP, IIP, credit offtake, and capacity utilisation — point to a deceleration in real activity since the first quarter of 2016-17 and a further deceleration in the third quarter.

growth declined to 6.1 per cent in the fourth quarter of 2016-17 against 6.9 per cent in the third quarter due to the effect of demonetisation.

Similarly, gross value added (GVA) growth fell to 5.6 per cent from 6.7 per cent over this period. In addition, the survey points out the real policy rate was tighter than anticipated in Volume I.

Citing Carmen Reinhart (University of Maryland) and Ken Rogoff (Harvard) on balance sheet recessions, the survey says India has been in the throes of weaker than potential growth rather than recessions for some time now.

The survey says the Indian boom of the mid-2000s has not been followed by serious deleveraging. While the slow growth of bank-credit in the last two years has been a source of concern, the question may well be not the slowdown but whether there has been enough of it.

"If deleveraging is a necessary condition for the resumption of rapid growth perhaps India needs less credit growth-or to be precise more debt resolution and reduction in the short run," it observes.

Sunil Kumar Sinha, principal economist with India Ratings says the survey fails to provide an answer to the burning question that despite growing macroeconomic stability and various policy initiatives taken by the government, how long will it take for India's growth to realize its potential.

"Also the narrative still has not moved away from policy rate cut to admitting that fixing the problem of real sectors is equally important as revival is not a one-way street," he says.

While the Central government is watchful about its finances in the first year of GST, the survey says state finances now face stresses from potential farm loan waivers, after impacted by liabilities.

Also, farm loan waiver could cut economy demand by up to 0.7 per cent of GDP, it says.

Based on information on 25 states, the combined fiscal deficit of States in 2016-17 (RE) would be 3.4 per cent after including the liabilities while it would be 2.7 per cent without the liabilities. So, there would be 0.7 percentage point impact on fiscal deficit due to bonds.

It says the budget for 2017-18 opted for a gradual consolidation as it projected the decline in the fiscal deficit to 3.2 percent of in 2017-18 compared with 3.5 percent of in 2016-17. The original fiscal consolidation roadmap had envisaged fiscal deficit at 3 per cent in 2017-18.

It says the consolidation path adopted by the Central government prudently balanced competing objectives of cyclically weakening economy and the imperatives of maintaining credibility.

However, the Survey is silent on whether lower transfer of dividend by RBI to the union government by half this year compared to a year ago will come in the way of meeting even 3.2 per cent target.

Already over 80 per cent of the Budget estimates for fiscal deficit has been touched in the first quarter itself. 

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