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Growth Likely to be Less Robust: Eco Survey

India's economic growth prospects in 2017/18 are likely to be less robust than what was anticipated six months ago, says the second volume of Economic Survey 2016/17, tabled in Parliament today.

twitter-logo Joe C Mathew   New Delhi     Last Updated: August 17, 2017  | 13:27 IST
Growth Likely to be Less Robust: Eco Survey

India's economic growth prospects in 2017/18 are likely to be less robust than what was anticipated six months ago, says the second volume of Economic Survey 2016/17, tabled in Parliament today.

While retaining the 6.75-7.5 per cent GDP growth projections presented in the first volume early this year, the second volume of the survey says that the balance of risks that were considered six months ago seem to have shifted to the downside. In other words, while growth can still be within the range, it is more likely to be towards the lower end of the range. "The balance of probabilities has changed accordingly, with outcomes closer to the upper end having much less weight than previously," the survey, prepared by Chief Economic Advisor Arvind Subramanian, points out.

The survey states that the earlier predictions were based on expectations of more buoyant exports as global recovery gathered steam, post-demonetisation catch-up in consumption, and relaxation of monetary conditions consequent upon demonetisation.

However, all the new factors - real exchange rate appreciation, farm loan waivers, increase in stress on balance sheets in power and telecommunications sectors, agricultural stress, and transitional challenges of implementing the GST- that came into play after the initial assessment, imparts a deflationary bias to business activity, the survey notes.

"Since February 2017, the rupee has appreciated by about 1.5 per cent in real effective terms according to the RBI's 36-currency basket- and by more against a basket with higher weights for China and Asian currencies. The deflationary impact of farm loan waivers will obviously depend upon how many states imitate the actions of UP, Maharashtra, Madhya Pradesh, and Karnataka, how much relief they provide, and how this relief is phased. In addition, the real policy rate was tighter than anticipated in Volume I of the Survey", the survey notes.

On the other side, the government's and the RBI's actions to meet the 'twin balance sheet challenge' and the positive impact of GST can provide some fillip, it adds.

The survey points out that sustaining current growth trajectory will require action on more normal drivers of growth such as investment and exports and cleaning up of balance sheets to facilitate credit growth.

The survey says that the outlook for inflation in the near term will be determined by a number of factors, including the outlook for capital flows and exchange rate, which in turn will be influenced by the outlook and policy in advanced economies, especially the US. Recent nominal exchange rate appreciation, monsoon, introduction of GST, 7th Pay Commission awards, likely farm loan waivers and the output gap were some of the other factors that were highlighted.

The document says that the fact that current inflation is running well below the 4 per cent target suggests that by March 2018 inflation is likely to be below the RBI's medium term target of 4 per cent.

As regards Review of Economic Developments 2016/17, the Survey notes that:


  •     Real economy grew by 7.1 per cent in 2016/17 compared with 8 per cent the previous year. This was higher than the range predicted in the Economic Survey (Volume I) in February. This growth suggested that the economy was relatively resilient to the large liquidity shock of demonetisation, which reduced cash in circulation by 22.6 per cent in the second half of 2016/17. The apparent resilience was even more marked in nominal growth magnitudes because both nominal GVA and GDP growth accelerated by over 1 percentage point in 2016/17 compared with 2015/16.
  •       Annual inflation averaged 5.9 per cent in 2014/15 and has since declined to 4.5 per cent in 2016/17. More dramatic have been developments during 2016/17 -- inflation declined sharply from 6.1 per cent in July 2016 to 1.5 per cent in June 2017.
  •     The sharp dip in WPI inflation in late 2014/15 and throughout 2015/16 owed to the deceleration in global commodity prices, especially crude oil prices. With global commodity prices recovering and the 'base effect' (low inflation in the previous year) giving an upward push, wholesale inflation perked up during 2016/17
  •       With green shoots slowly becoming visible in merchandise trade, and robust capital flows, the external position appears robust, reflected inter alia in rising reserves and a strengthening exchange rate.
  •       The current account deficit narrowed in 2016/17 to 0.7 per cent of GDP, down from 1.1 per cent of GDP the previous year, led by a sharp contraction in trade deficit, which more than outweighed the decline in net invisibles
  •      Export growth turned positive after a gap of two years and imports contracted marginally, so that India's trade deficit narrowed to 5.0 per cent of GDP (US$
  • billion) in 2016/17 as compared to 6.2 per cent (US$ 130.1 billion) in the previous year.


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