Economic Survey: Cautious on growth and cautions on fiscal consolidation

The Economic Survey 2016-17 tabled in the Parliament today projected an economic growth of anywhere between 6.75 percent and 7.5 percent of the gross domestic product (GDP) for the 2017-18 fiscal. This is a tad cautious especially in the context of reports that the economy, post-demonetisation, will be adequately re-monetised by end of this fiscal and growth should return next year. The survey put the 2016-17 GDP growth at 6.50 percent to 6.75 percent after factoring in the impact of demonetisation. The Reserve Bank of India (RBI)and the Central Statistical Office (CSO) had earlier put the growth at 7.10 percent without factoring the impact of the withdrawal of high denomination notes. According to the Survey, the impact of demonetisation is expected to be 0.5 percent of the GDP.

Terming the November 8 demonetisation move as an “unusual and unprecedented monetary experience”, Indian government’s Chief Economic Adviser Arvind Subramanian said the adverse impact of demonetisation on India’s GDP growth will be only transitional. “As remonetisation happens, the economy will be back on track,” said Subramanian at a press conference held in Delhi, soon after the Economic Survey 2016-17 was tabled in Parliament by Union finance minister Arun Jaitley. He also indicated that that full remonetisation of the country’s economy will happen over the next 1-2 months. However the Survey pointed out to the need for policy support for the economy to revive after demonetisation. It remains to be seen if Jaitley would provide them tomorrow when he presents his fourth Budget.

On the most debated issue of fiscal consolidation (whether the FM should go for a fiscal deficit target of 3 percent next fiscal or slow down the process of consolidation and opt for a number between 3.5 percent and 3 percent and use the funds thus freed up to spend on infrastructure in a bid to boost growth), the Survey was clear in stating that fiscal activism does not help while fiscal prudence does. It, however, called for modifying the operational framework of Fiscal Responsibility and Budget Management. The N K Singh Committee which had looked into this has reportedly recommended just that and the government is expected to accept the same. That will give some leeway to the government to spend while not entirely giving up on fiscal consolidation. While the slowdown in economic activity has constrained GDP growth, it seems the Government is committed to achieving the fiscal deficit target of 3.5 percent in 2016-17.  “Silence on fiscal deficit target of 3 percent for financial year 2017-18 perhaps indicates Government’s desire to loosen the purse strings for spurring growth and demand,” said Mukesh Butani, Managing Partner, BMR Legal.

The Survey also said that lower interest rates will boost the economy. While on one hand, demonetisation has led to reduced cash flow, on the other, it has increased supply of deposits. As a result, lending rate has come down by 90 basic points, said Subramanian. But the Survey warned that sharp increase in prices will cap room for a possible monetary easing. This would mean that the industry should not expect any significant reduction in interest rate by RBI going forward. On the subject of bad loans, the Survey advocated setting up of `Bad Debt Banks’ to take away the toxic assets from the banks which would then allow them to focus on their lending operations. “The economic survey confirms the balooning of bad debts with banks in the current financial year. To ring-fence the ongoing operations of the banks, the economic survey suggests creation of a "Bad debt bank" to take away the toxic debts from the regular banks, allowing them to focus on current and future banking obligations. A Public Sector Asset Rehabilitation Agency (PARA) is thus proposed which would help realign banking sector towards focusing on funding new projects,” Jaijit Bhattacharya, Partner Strategy & Economics KPMG India. This subject, however, has been under discussion last year but strong opposition by section of experts on the grounds that just shifting the bad loans out of the books will not bring about any systemic changes among the banks and bad debts would start piling up again put paid to the plans last year.

The Survey also touched upon 'Universal Basic Income' – a new concept that has caught the fancy of policy makers in the country. This involves leaving money in the hands of the people rather than offering it to them through subsidies which tend to distort the market.  On Universal Basic Income, Subramanian - who authored The Economic Survey - said that even as the time is right for deliberation, but there may be a few challenges as far implementation is concerned. While the Universal Basic Income is an alternative to the various social welfare schemes in an effort to reduce poverty, it may have to replace many other existing schemes, he said.

The Economic Survey has been received well. D.K. Srivastava, Chief Policy Advisor, EY India, said, “the Economic Survey rightly calls for focused actions to be able to reap the long term gains of demonetisation which in turn will help achieve better tax compliance, higher tax revenues and enhanced GDP growth. Besides expeditious remonetisation of the economy, the drivers of black money creation need to be curbed.  Measures like bringing land and real estate into the GST, reducing corporate and personal income taxes, lowering stamp duties, and policies for formalization and digitization of the economy will lay the ground for long term gains to the economy.”

Confederation of the Indian Industry (CII) is also enthused. “CII is in agreement with the Economic Survey that the impact of demonetization on the GDP growth rate will be temporary and that once remonetisation is effected, the growth rate would revert to over 7 per cent. The Economic Survey’s estimate of GDP growth at 6.75-7.5 per cent for 20107-18 is on expected lines, and we believe that this will be achieved. The strong macroeconomic fundamentals brought out in the Economic Survey are commendable during challenging global developments. Chandrajit Banerjee, Director General, CII said.