Tuesday, 17 October, 2017

Economic Survey Volume II key highlights: Economy relatively resilient to demonetisation

Economic Survey: 10 takeaways from Narendra Modi government's economic report card ahead of Independence Day India finance minister flags growth risks, pushes for monetary easing
Wilma Wheeler | 12 August, 2017, 01:32

While speaking at the Economic Survey 2016-17, Arvind praised the Goods and Services Tax (GST) and called it an astonishing feat of administration.

On the structural reform agenda, the Survey said the Government is implementing GST, Air India privatisation, further cutting down on energy subsidies, addressing twin balance sheet challenge facing banks.

Post-demonetisation, a new enforcement and compliance regime and increased digitalisation have reduced the use of cash for transactions, the survey said.

The Survey, tabled by Finance Minister Arun Jaitley in the Lok Sabha on the last day of the monsoon session, explained that current inflation is running well below the 4 percent target, and suggests that inflation by March 2018 is likely to be below the Reserve Bank of India's (RBI) medium term target of 4 percent.

One of his favourite pinch-inflation easing out so should the monetary policy be has found its way into the Survey.

However the Survey cautions that anxiety reigns because a series of deflationary impulses are weighing on an economy, yet to gather its full momentum and still away from its potential.

The CEA also warned against farm loan waivers explaining that if all states start offering them, its impact on the economy would be deflationary rather than inflationary.

Chief Economic Advisor Arvind Subramanian who is the force behind the Survey, while trying to project a realist picture through the the Survey said deflationary challenges like lower farm revenues, decline in non-cereal food prices, farm loan waivers, fiscal pruning, and declining profitability in the power and telecommunication sectors - can be hard to overcome.

He said structural decline in inflation and inflation outlook create scope for lower interest rates.

Drafted by Chief Economic Advisor Arvind Subramanian, the survey reflected strong growth in tax revenue, sustenance of the pace of capital spending and a consolidation of non-salary or pension revenue expenditure.

Outlining the benefits of demonetisation, he said there are early signs as cash usage in the economy has come down. It states that there may be a slowdown in growth in real activity in indicators such as Gross Domestic Product (GDP), Index of Industrial Production (IIP), credit, investment, and capacity utilisation since first quarter of 2016-17.

India's economy grew by 7.1 per cent in the 2016-17 fiscal.

The survey further pointed that sluggish growth and increasing indebtedness in some sectors of the economy have impacted the asset quality of banks and is cause for concern. Since February 2017, the rupee has appreciated by about 1.5 percent. "Cyclical conditions suggest that the policy rate should actually be below".

As per the Survey, the Government and the RBI have taken prominent steps to address the twin balance sheet challenge which has boosted market confidence in the short run.

The survey called for a further drop in interest rates - now at 6 percent after a 25 basis points cut last week.

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