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Chief Economic Advisor Arvind Subramanian on Friday stated that while farmer loan-waivers will be deflationary, state governments must accommodate these either by reducing expenditure, or increasing tax rates.
Addressing a press conference here post the release of the Economic Survey 2016-17 Part II, Subramanian, while explaining the same cited the case of the Uttar Pradesh budget, where in a 13 per cent slash in capital expenditure was undertaken to accommodate loan waivers for farmers.
"Farm loan waivers will be deflationary, not inflationary. The Centre will not relax fiscal borrowing limits. Therefore, the states will either have to cut expense, or raise taxes," he said.
With regards to current inflation rates, Subramanian reassured that by the end of March, inflation will be well within the target of three per cent, on the backdrop of a host of factors such as implementation of the Goods and Services Tax (GST), 7th Pay commission, good monsoon, exchange rates and so on.
"Last ten months, we have done better than our target, and have substantially overachieved on checking inflation.
There has also been an increase in exports, with the World economy in its recovery phase. Also, the GST is an astonishing feat of administration, politics and technology. A combination of these factors will help curb inflation close to the 3 per cent mark," said Arvind.
However, Arvind highlighted a greater drag on short-term growth due to a rising stress in certain industries, such as telecommunications and power.
In both of the aforementioned sectors, Arvind highlighted that the rising stress is attributable to sudden shocks, which will, in the long run, transcend into a positive impact for the two sectors, thus transferring the benefits of this to the balance sheets of industry players.
"With a new entrant into the telecom market and the emphasis of renewable energy generation, the telecommunication and power sector are experiencing rising stress due to sudden shocks. However, this will have a positive impact at a later stage," said Arvind.
Also, greater drag on growth can be attributed to high real interest rate, favourable exchange rate, and high competitiveness, he added.