October 23, 2017

Downside risks to growth, inflation to undershoot : Economic Survey

11 August 2017, 02:06 | Edward Lowe

The economic survey is presented by the Chief Economic Adviser in this case Arvind Subramanian. Pic Reuters

Economic Survey Vol II tabled 'Rekindled optimism on structural reforms'

The subsequent launch of a national Goods and Services Tax (GST) has caused chaos on the ground as ambiguous rules have left firms confused on how to price their products.

The document said that a growing confidence that macro-economic stability has become entrenched is evident because of a series of government and RBI actions and because of structural changes in the oil market have reduced the risk of sustained price increases.

The Survey warned of fiscal slippages as "a series of deflationary impulses are weighing on an economy yet to gather its full momentum".

The survey has mentioned that inflation is expected to remain below the Reserve Bank of India's four percent target through to the end of the fiscal year and described scope for monetary easing as "considerable".

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"These include: stressed farm revenues, as non-cereal food prices have declined, farm loan waivers and the fiscal tightening they will entail and declining profitability in the power and telecommunication sectors, further exacerbating the twin-balance sheet (TBS) problem", the survey said.

"Also, farm loan waivers could reduce aggregate demand by as much as 0.7% of GDP, imparting a significant deflationary shock to an economy", the Survey noted.

"Current inflation, at 1.5 percent, is running well below the 4 percent target, with the domestic economy lacking the dynamism to push this back toward the target", the Survey said.

"The ratio of stressed companies in the power sector has been steadily rising this year, reaching 70%, with an associated vulnerable debt of over Rs3.6 trillion".

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Noting that during 2016-17, gross bank credit outstanding grew at around 7 per cent on an average, the Survey said, "The sluggish growth can be attributed to several factors, including incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers". More dramatic have been developments during 2016-17- inflation declined sharply from 6.1 percent in July 2016 to 1.5 per cent in June 2017.

Highlighting monetary management and financial intermediation, the Economic Survey Part II, tabled in the Parliament here today reflected strong growth in tax revenue, sustenance of the pace of capital spending and a consolidation of non-salary or pension revenue expenditure. This suggests the economy is relatively resilient to the large liquidity shock of demonetisation.

Disinflationary pressures allowed the Reserve Bank of India last week to cut its main policy rate - the first easing by an Asian central bank this year - by 25 basis points to 6 percent, the lowest since November 2010.

The Economic Survey expects fiscal deficit to decline to 3.2% of GDP in FY18 compared with 3.5% in FY17.

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