Economy red flags go up - Survey signals risks, pushes for rate cut
| August 11, 2017, Jayanta Roy Chowdhury and R. Suryamurthy |
India's growth juggernaut has started to lose steam.In the mid-year Economic Survey, chief economic adviser Arvind Subramanian flagged big risks to economic growth and fiscal targets while asserting that the country had entered a "new phase of relatively low, possibly very low, inflation".
In the first volume of the survey published in January, the government had forecast GDP growth in the range of 6.75 to 7.5 per cent in 2017-18.Today, the second volume of the survey said there was a downside risk to that forecast stemming from several factors: the farm loan waiver, challenges in implementing the goods and services tax (GST), real exchange rate appreciation, increasing pressure on corporate balance sheets in power and telecommunications and agriculture stress.
The combination of these factors would impart a deflationary bias to activity, the survey said. "The deflationary impact this year could be as much as 0.35 per cent of GDP," it added.
Finance minister Arun Jaitley had earlier asserted with confidence that India would achieve a growth rate of 7.5 per cent this year.However, economists now feel that it may be hard to achieve 7 per cent. The Narendra Modi government had already drawn flak with the growth rate tumbling to 7.1 per cent in the year ended March 31 because of the disruptive impact of demonetisation.
"The survey is a clear admission of the decorating tendencies which demonetisation had ushered in or had accentuated," said Biswajit Dhar of Jawaharlal Nehru University. "Quite correctly, chief economic adviser Arvind Subramanian (whose team has written the survey) has admitted these are uncertain times."
Growth had slowed to 6.1 per cent in the January-March quarter, hitting its lowest in more than two years following the recall of the high-value currency notes from circulation.
The survey said that retail inflation - currently running at 1.54 per cent - was likely to stay well below the RBI's medium-term target of 4 per cent.
Subramanian again built a case for a sharp cut in interest rates - an issue on which he has sparred with the RBI in the past. The survey said there was "considerable" scope for further monetary easing as the policy repo rate was 25 to 75 basis points above the neutral rate.
The report warned that the rash of farm loan waivers - which the survey estimated could range between Rs 2.2 and 2.7 lakh crore - would have a deflationary impact.
Finance ministry officials admitted that the figure could be surpassed if other states such as Punjab and Bihar followed suit. Subramanian told reporters that the farm loan waivers, leading to the slashing of expenditure by states, "represent less demand and less growth".
However, some economists disagreed with this view. N.R. Bhanumurthy of the National Institute of Public Finance and Policy said: "I do not agree with the survey's view that farm loan waiver is disinflationary. Rather the growth story will be hit because of inflation arising out of this."
Bhanumurthy added: "Shifting capital spending to revenue spending (on farm loan waiver) will dampen growth and result in inflationary pressure as farmers with excess money will chase supplies which cannot increase in the short run to meet the sudden bump in demand."
Demonetisation has been something of a puzzle, the survey said. While real growth had decelerated, the slowdown was much smaller than expected. "Growth for the year as a whole was much higher than (the) range of 6.5-6.75 per cent estimated in the Economic Survey 2016-17 Volume I," it said. What was even more surprising was that nominal GDP had accelerated after demonetisation.
Demonetisation forced the central bank to halve its dividend payout to the Centre to Rs 30,659 crore this year - the lowest in five years - putting greater pressure on the Modi government to meet this year's fiscal deficit target of 3.2 per cent of GDP. The introduction of the GST in July has also caused uncertainty in India's retail and small business sectors, which seemed temporarily unable to cope with the new tax challenges. D.K. Joshi, chief policy advisor of EY India, said that because of the "two consecutive (steps)... demonetisation and the GST, the economy continues to suffer from deficient investment".
The survey highlighted the economic impact of the bad loan crisis that has rocked the Indian economy. After the government passed an ordinance in May to facilitate quicker debt resolution, the RBI identified a dozen highly stressed companies whose combined debt totalled Rs 2.2 lakh crore.
The central bank has also placed six weak banks under a "prompt corrective action framework", forcing these banks to start reducing the scale of their operations.Economists say the bad loan crisis and the loss of jobs in factories that have been hit by the withering effects of demonetisation would make it harder for India to maintain its position in the world pecking order. It has already lost its bragging rights to China whose growth rate has once again outpaced India's.
"The equation looks dicey for India at the moment," warned Dhar.
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