Agencies
New Delhi, August 11: The government Friday presented the mid-year economic survey for 2016-17 — Economic Survey-II — in Parliament. It signalled price stability and expectation that retail inflation at the end of March 2018 will remain within RBI’s medium term target of 4 per cent, among other things. It was the first time that the government presented a mid-year economic survey, highlighting newer factors the economy faces.
According to the government, the fact that inflation at present is well below 4 per cent, suggests that the RBI target for March 2018 would be met. The survey has indicated that CPI inflation declined to 4.5 per cent during 2016-17, with a broad-based price decline in all major commodity groups. It has been below 4 per cent for the past eight months.
“[There has been] significant moderation in CPI headline inflation during the last three years. CPI inflation fell to a series low of 1.5 per cent in June 2017,” the survey noted.
Noting that most states and UTs saw a sharp decline in CPI inflation in 2016-17 compared with the previous year, the document stated, “Both rural and urban inflation declined in 2016-17 and the gap between rural and urban inflation has narrowed in recent months.”
In sum, the survey pointed out that geopolitical risks were not as risky as earlier. “Technology has rendered India less susceptible to the vicissitudes of geo-economics (OPEC) and geopolitics (the Middle-East),” it added.
With reference to the survey, Chief Economic Adviser Arvind Subramanian, however, has said that there were downside risks to the official growth forecast of 6.75-7.5 per cent for the fiscal year to March 2018.
Growth had slowed to 6.1 per cent in the March quarter, hitting its lowest in over two years following demonetisation. The launch of Goods and Services Tax (GST) has also caused chaos in pricing.
The report by Subramanian also saw “considerable” scope for further easing as the policy repo rate was 25-75 basis above the neutral rate.
The survey said real neutral interest rates hover about 1.25 and 1.75 per cent and added that it “implies neutral nominal rates — assuming a target inflation of 4 per cent — of 5.25-5.75 per cent”. “Today’s rate is 6 per cent or about 25-75 basis points above neutral rates,” it added.
Noting that during 2016-17, gross bank credit outstanding grew at around 7 per cent on an average, the Survey said, “The sluggish growth can be attributed to several factors, including incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers.”
It further pointed out that the twin balance sheet problem — at the end of banks and corporates — more attractive interest rates for borrowers in the bond market and from non-banking financial institutions are other reasons for slow bank credit growth.
The survey said sluggish growth and increasing indebtedness in some sectors of the economy have affected asset quality of banks, which is a cause for concern.
Highlights
# 7.5% real GDP growth predicted in January difficult to achieve
# Fiscal deficit expected to decline to 3.2% of GDP in 2017-18, compared with 3.5% in 2016-17.
# Retail inflation likely to remain under 4% by March 2018.
# Fiscal outlook for 2017-18 uncertain.
# Considerable scope for monetary policy easing; repo rate is 25-75 basis points above neutral rate.
# Structural reform agenda includes implementing GST, Air India privatisation, rationalising energy subsidies, addressing twin balance sheet challenge facing banks.
# Early signs of tax base expanding post implementation of Goods and Services Tax (GST).
# Nominal GDP growth accelerated post demonetisation; 5.4 lakh new taxpayers post note ban.
# Demonetisation may continue to pay dividends over time.
# Farm loan waiver could cut economy demand by up to 0.7% of GDP; State farm loan waivers could touch Rs2.7 lakh crore.
# Stock limits, movement curbs on farm goods need to end.
# Credit off-take from banks continued to decelerate.
# Private banks’ loan growth more robust than of PSU banks.
# House rent allowance may push inflation by 40-100 bps.
# Economy lags dynamism to push inflation towards 4%.
# Geopolitics not as big a risk for oil prices as before.
# Gross non-performing advances (GNPAs) ratio of Scheduled Commercial Banks (SCBs) rose from 9.2 per cent in September 2016 to 9.5 per cent in March 2017.
# India targets to lower the emissions intensity of GDP by 33-35 per cent by 2030; will raise share of non-fossil fuel based power generation capacity to 40 per cent.
# Urgent need to increase access of the poor to more efficient energy resources.
# Current account deficit (CAD) down to 0.7% of GDP in 2016-17 from 1.1 per cent in 2015-16.
# Gross FDI inflows to India increased significantly to $60.2 billion in 2016-17 from $55.6 billion in 2015-16.
# Net FDI inflows at $35.6 billion as opposed to $36 billion in 2015-16.
# India’s forex reserves of $386.4 billion second largest after Brazil among major economies.
# Green shoots on trade horizon; world trade growth projected at 3.8% and 3.9% in 2017 and 2018.
# India’s trade growth picking up.
# Deterioration in quality learning in primary education,
# Targeted enrolment in middle education a challenge.
# Employment poses great challenge in structure dominated by informal, unorganised and seasonal workers.
# High levels of under-employment, skill shortages.
# Labour market impacted by rigid laws and emergence of contract labour.
