Deflation may lay economy low

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India may not achieve the upper-end of the 6.75-7.5 per cent growth forecast for the current fiscal, noted the second volume of the Economic Survey 2016-17, saying the economy was weighed down by “deflationary impulses” arising from farm loan waivers, exchange rate appreciation and GST implementation.

“We are not changing the growth forecast range (6.75-7.5 per cent). But we are less likely to see the economy achieving the upper end of the range,” said Arvind Subramanian, Chief Economic Advisor, who authors the Survey.

In the March quarter, growth slowed to 6.1 per cent, the lowest in more than two years, seen mainly as a fallout of demonetisation.

Points to deceleration

The Survey said all indicators “pointed to a deceleration in real activity since the first quarter of 2016-17, and a further deceleration since the third quarter”. In this milieu, it said, farm loan waiver could come as a further shock as it is likely to reduce aggregate demand by as much as 0.7 per cent of GDP.

Earlier on Friday, Finance Minister Arun Jaitley tabled the second volume of the Survey in the Lok Sabha.

For India to sustain the current growth trajectory — in the last two years, real GDP growth has averaged 7.5 per cent — the Survey suggested action on investment and export fronts besides cleaning up the balance sheets.

“For the year ahead, the structural reform agenda will be one of implementing actual and promised actions — GST, Air India privatisation, and, critically, the Twin Balance Sheet (TBS) challenge,” the Survey said.

With inflation remaining below the Reserve Bank of India’s medium-term target of 4 per cent, the Survey saw “considerable” scope for further easing in monetary policy as the repo rate was 25-75 basis above the neutral rate. The RBI 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,” the Survey said.

To a better GST

The latest Survey Volume, while lauding the efforts of the GST Council, saw scope for improvement to the rate structure and exclusions to make a good GST an even better one.

It called for the inclusion of electricity in the GST framework. This would improve the competitiveness of Indian industry because taxes on power get embedded in manufacturers’ costs, and can be claimed as input tax credit.

It felt the inclusion of land, real estate and alcohol in GST will improve transparency and reduce corruption.

The Survey also said that the 3 per cent tax on gold and jewellery products — items that are disproportionately consumed by the rich — is “still low”. Excluding health and education is inconsistent, it felt.

Banking sector

Even as the government and the RBI act to address the twin balance sheet (TBS) challenge, there is a need to complement the efforts with reform and recapitalisation.

The Survey mooted a three-element reform package: Selective rescue of banks, expanded role for the private sector, and specific actions such as recapitalising, strengthening lending and risk management frameworks.


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Loknath Das

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