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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.