Economic Survey II: All is not well, says Rupa Rege Nitsure

Volume-II of the Economic Survey for 2016-17 is historic. The second volume, published for the first time for the sake of better data availability and analysis, has come almost six months after the first volume. Indeed, the move has facilitated a more realistic and efficient analysis of India’s economic performance for the year gone by. The important underlying message is that “all is not well” and several disinflationary impulses are weighing on India’s economic growth. With the facility of additional data points in hand, the Survey now sees a clear shifting of balance of risks to the downside for its earlier real GDP projection of 6.75 per cent to 7.5 per cent made in February. Unless the normal drivers of growth — notably, investment, exports and bank credit — are re-energised, there is no guarantee of sustaining growth near 7 per cent, states the Survey, describing India’s growth experience of the past two years as “exceptional”, in the absence of these drivers.  

Rupa Rege Nitsure, Group Chief Economist, L&T Financial Services.

While the Survey sounds optimistic on the medium-term outlook — thanks to the launching of the historic goods and services tax, the decision to privatise Air India and the specific moves to reduce the lingering problems of high corporate debt and bad loans of the banking sector, it remains concerned about the disinflationary pressures stemming from farm sector stresses due to the crashing of major food grain prices, adverse fiscal implications of farm loan waivers and declining profitability of power and telecommunication sectors. Moreover, the Survey has warned against the sudden correction in inflated asset prices that have less to do with fundamentals and more with excess global liquidity.  The following could be taken as the Survey’s major takes on some important economic parameters:

Inflation: India might already be in the throes of a structural disinflationary shift due to a durable collapse of global oil prices, improved stability in cereal production and technology driven improvements in agricultural policies and markets. Moreover, current inflation is running well below the Reserve Bank of India’s 4 per cent target and likely to undershoot the target even in March 2018, given the evolving growth-inflation mix.

Monetary policy: The inflation-targeting-cum-MPC framework is new, and establishing credibility for it is imperative. Even if policy transmission through credit segments is not complete so far, there is a scope to reduce policy rates further from the perspective of financial stability as it would lower the cost of funds for banks and speed up the corporate deleveraging process.    

Exchange rate: While the Survey admits that India’s exchange rate is overvalued in real terms making exports less competitive, it has avoided making any explicit comments on India’s growing dependence on debt financing & portfolio inflows. This is a bit strange given its clear-cut warning on the increased probability of asset price correction.  

Fiscal scene: The government’s fiscal outlook for 2017-18 looks uncertain due to slower growth of tax collections, led by lower nominal GDP growth, reduced GST collections due to lower than pre-GST tax rates & other adjustment hiccups, reduced spectrum receipts and higher current expenditure due to the Pay Commission award. Also, the outlook on compliance benefits of the GST and demonetisation cannot be ascertained at this point of time.       

Demonetisation: While demonetisation has significantly increased the pace of digitalisation in India, it remains to be seen whether its impact on reducing black market transactions in real estate/housing sectors is permanent. So far, it has not helped tax collections in a big way. The full effect of demonetisation on tax collections will materialise only gradually. Also, demonetisation significantly increased demand for social insurance, particularly in less developed states.

Banking sector: Public sector banks are stuck in damage limitation mode and not able to focus on business. To help the sector regain vitality, it is necessary to weed out worst performing banks and “rescues” need to be extended only to the group of viable and near-viable banks. In some cases, majority private ownership may also be considered. All these measures should be supplemented with specific actions of recapitalisation and improving the lending and risk management procedures.

While the Survey has comprehensively dealt with all domestic issues having bearing on the nation’s macroeconomic stability, its lesser attention to the brewing risks on the external sector front remains a big puzzle.

(Views expressed are personal)