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Economic Survey II: Achieving 7.5% GDP growth difficult in FY18, says govt

Indivjal Dhasmana/New Delhi 12 Aug 17 | 02:05 AM

After more data were released on the health of the economy, economic advisors in the finance ministry now realise that clocking 7.5 per cent growth may be a difficult task for the current fiscal year. 

Not that they were 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 the twin balance sheet problem would pan out. Now they are more firm that risks to the upper range have increased. 

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The International Monetary Fund (IMF) and the World Bank have already projected India’s economy will grow 7.2 per cent, a tad higher than last year. The Survey, authored by Chief Economic Advisor Arvind Subramanian and his team, says the balance of risks seems 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 GDP numbers to be released by the end of this month will provide some indication of growth figures for 2017-18. The second quarter will witness the damping effect of the GST implementation, which is already evident in the purchasing managers’ index numbers. 

Besides transition issues of GST implementation, the Survey lists other challenges such as appreciation of the rupee, farm loan waivers, and rising stress on balance sheets in power as well as telecom. It says a number of indicators — the GDP, the IIP, credit offtake, investment and capacity utilisation — point to a deceleration in real economic activity since the first quarter of 2016-17 and a further deceleration since the third quarter.

GDP 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 University) on balance sheet recessions, the Survey says India has been in the throes of weaker than potential growth rather than recession 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," the Survey 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 realise its potential. While the central government is watchful about its finances in the first year of the GST, the Survey says state  finances now face stresses from potential farm loan waivers after being impacted by UDAY liabilities. 

Also, farm loan waivers could lower demand by up to 0.7 per cent of the GDP, it says.

Based on information on 25 states, the combined fiscal deficit of states in 2016-17 (RE) will be 3.4 per cent after including the UDAY liabilities and 2.7 per cent without them. There will be a 0.7 percentage point impact on the fiscal deficit of the UDAY bonds. 

It says the Budget for 2017-18 opted for a gradual consolidation as it projected a decline in the fiscal deficit to 3.2 per cent of the GDP in 2017-18 from 3.5 per cent in 2016-17. The original fiscal consolidation road map had envisaged fiscal deficit of three per cent in 2017-18.

The Survey says the consolidation path adopted by the central government prudently balanced competing objectives of a cyclically weakening economy and the imperatives of maintaining credibility. 

However, the Survey is silent on whether lower dividend by the RBI to the government this year will come in the way of meeting even the 3.2 per cent fiscal deficit target. 

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

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