Cause for caution, not gloom 
Red Book
Red Book

Pre-cum-Mains GS Foundation Program for UPSC 2026 | Starting from 14th Nov. 2024 Click Here for more information

Cause for caution, not gloom 

Context:

The Economic Survey volume II cautions policymakers of  a possible deflationary cycle.

Growth rate:

On the growth rate, while adhering to the forecast in Volume 1 for real GDP growth rate of 6.75%-7.5% this year, it suggests that the balance of risk has shifted to the downward side of the range.

Key points:

  • Just one day prior to the Economic Survey, the Finance Minister presented to Parliament the Medium-Term Expenditure Framework statement in pursuance of the Fiscal Responsibility and Budget Management Act, 2003.
  • The framework assumes that nominal GDP growth for the current (2017-18) and subsequent two years would be 11.75%, 12.3% respectively
  • Inflation rate is expected to be about 4%.
  • Savings and investment ratio has declined in the recent period.

Solutions:

  • The savings-investment ratio would need to be increased.
  • Reducing public dissavings through privatisations such as Air India and other measures to boost savings
  • The demand boost  inevitable comes from domestic consumption which accounted for about 90% of GDP growth in FY 2017.
  • The survey projections accept the fiscal deficit of 3.2% in the current year and 3% for the subsequent two years.

Rekindling inflation :

  • Faster resolution of the twin balance sheets is critical to rekindling private investment
  • Accelerating the pace of agricultural reform
  • Targeted capital expenditure
  • Improving ease of doing business
  • Multiple infrastructure initiatives like roads, and power
  • Stressed sectors like telecom and power need speedier resolution

Inflation rate:

  • The Economic Survey argues that India had moved to a low inflation trajectory, due to  supply-side elasticity in agriculture and long-term softening of global oil prices.
  • The Economic Survey seeks to highlight that for sustained 14 quarters the actual inflation (WPI-CPI) has undershot the projections made by the Reserve Bank (RBI).
  • In the Indian context ral neutral interest rates hover around 1.2-1.75% and that the present rate is about 25-75 basis points above the neutral rate.

Monetary policy:

  • On monetary policy, the central bankers have all over made calculations and undershot inflation targets.
  • The inflation target is 4%.
  • Multiplier benefits from low interest rate regimes are contingent on deeper structural reforms
  • Regarding the exchange rate, real effective interest rates have appreciated significantly.
  • The RBI has  the unenviable challenges  of managing significant inward capital flows with exchange rates which do not penalise domestic industry through a premium on cheaper imports.

Reasons:

  • Fiscal tightening by states due to Ujwal DISCOM Assurance Yojana (UDAY),
  • farm loan waiver,
  • declining profitability of some key sectors like power and telecom,
  • The shadow of unresolved twin balance sheet problems and transitional issues of the GST are contributory to deflationary pressures.

UDAY:

  • The scheme UDAY is designed to clean up the  balance sheets of electricity boards in the short run and is expected to improve management of electricity boards.
  • Appropriate action on tariff fixation, regular  billing cycles, monitoring timely collection by distributing companies is an integral part of the UDAY package.
  • This would benefit state’s finances.

Conclusion:

  • For addressing the above mentioned issues, short term state specific measures would need to be innovatively conceived.
  • The recent initiatives to improve the fertilizer mix through extensive soil-testing along with the Pradhan Mantri Fasal Bima Yojana will prove beneficial to stabilise farm incomes.
Print Friendly and PDF
Blog
Academy
Community