Growth likely to be in the lower range, closer to 6.5%: 

Growth likely to be in the lower range, closer to 6.5%: 

Context:

The Indian economy’s growth in 2017-18 is more likely to be closer to 6.5% than 7.5%, according to Chief Economic Adviser Arvind Subramanian.

Introduction:

• Union finance minister Arun Jaitley tables second volume of the Economic Survey 2016-17 in Lok Sabha
• The Economic Survey expects fiscal deficit to decline to 3.2% of GDP in FY18 compared with 3.5% in FY17
• The Survey, anchored by chief economic adviser Arvind Subramanian, said the deflationary impact this year could be as much as 0.35% of gross domestic product (GDP). It cited the example of Uttar Pradesh, which has slashed capital expenditure by 13% to accommodate a Rs36,359 crore loan waiver.

Survey highlights:

• Farmers’ incomes stressed by lower non-cereal food prices, farm loan waivers and the consequent fiscal tightening by state governments, and strains in the power and telecommunication sectors that are exacerbating the so-called twin balance sheet problem are among the deflationary impulses that will limit economic growth in the short run.
• The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.
• With monetary policy having been tighter than assumed and the rupee having appreciated against the dollar, the balance of risk has shifted to the downside and it is unlikely that the upper band of the projected growth rate will be achieved,
• GDP growth slipped from 7.7% in the first half of 2016-17 to 6.5% in the second half.
• The slowdown in GDP indicators predated the demonetization of high-value banknotes in November, but intensified in the post-demonetization period.
• Structural reforms such as the goods and services tax (GST) and a larger tax base in the aftermath of demonetization may boost economic growth in the medium term.
• India is undergoing a structural shift toward low inflation, mostly due to changing dynamics in the oil market, which has capped upside risk, according to the Survey.
• On the impact of demonetization, the Survey said it had increased demand for social insurance such as the rural job guarantee scheme, particularly in less developed states.

Background:

• The first volume of the Economic Survey released in January had projected the economy to grow in the range of 6.75-7.5% in 2017-18 against 7.1% in 2016-17.

Short term challenges:

•  Fiscal tightening by state governments due to farm loan waivers.
•  Appreciating Rupee
•  Tight monetary policy
•   Declining profitability in the power and telecom sectors

Solutions:

• Boost investment and exports
• Clean up bank balance sheets
• Monetary policy easing
• Privatize laggard public sector banks