The Economic Survey, Volume 2 presented today made no concealment of the hard times ahead while forecasting uncertain fiscal outlook for the current fiscal year and warned that attaining 6.75-7.5 per cent GDP growth projected previously will be no cakewalk as appreciation of rupee, farm loan waivers and challenges from implementing GST continue to cast shadows on the Indian economy's bright spots.
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 difficult to overcome.
The Survey is concerned over the under-performance of the economy and said it is operating below its potential.
"Economy is yet to gather its full momentum and still away from its potential," Survey said.
One of his favourite pinch—inflation easing out so should the monetary policy be has found its way into the Survey.
Expectedly the Survey said inflation is expected to remain below the Reserve Bank of India's 4 per cent target throughout the fiscal year so the scope for monetary easing as "considerable".
"Cyclical conditions suggest that the policy rate should actually be below... the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, it said.
The Survey took note that all indicators -- GDP, IIP, credit offtake, investment and capacity utilisation -- point to a deceleration in real activity since first quarter of 2016-17 and a further deceleration since the third quarter.
On the expected lines, the Survey stated fiscal deficit expected to decline to 3.2 per cent of GDP in FY2018 compared with 3.5 per cent in FY2017.
“ CPI inflation by March likely to remain below 4 per cent. Annual inflation averaged 5.9 per cent in 2014-15 and has since declined to 4.5 per cent in FY 2017. More dramatic have been developments during 2016-17- inflation declined sharply from 6.1 percent in July 2016 to 1.5 per cent in June 2017”, it said.
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.
Stating that there are early signs of tax base expanding under GST and nominal GDP growth has accelerated after demonetisation, the CEA said in a press conference later “Demonetisation will continue to pay dividends over time. There are 5.4 lakh New Tax Payers Post-Demonetisation and its impact on the informal economy has increased”.
The Survey was critical of the state farm loan waivers warning that could touch Rs 2.7 lakh crore. Farm loan waivers could cut economic demand up to 0.7% of GDP and likely to give deflationary shock to the economy.
There are deflationary impulses hovering on the economy. There will be downside risks to FY18 GDP forecast of 6.75-7.5%, said the Survey.
The Survey noted that the House rent allowance could push CPI by 40-100 bps where as the loan growth of Private banks would be more robust than that of PSU banks.
The Survey too acknowledged the role of a new entrant (Reliance Jio) for giving “shocks” to the sector.
“Telecom sector has experienced "renewables shock" in the form of a new entrant after launching of services by the new entrant in September 2016,” it said.