Coming just over two months after the government’s demonetization of high-value currency notes, the Economic Survey 2016-17, tabled in Parliament on Tuesday, tries hard to maintain an optimistic tone as it projects GDP growth in the range of 6-6.75 per cent in the current fiscal and commits to a prudent fiscal deficit of 3.5 per cent of the GDP.
Arvind Subramanian, chief economic advisor (CEA) in the finance ministry, estimated real GDP growth to slow down by 25 basis points (bps) to 50 bps relative to baseline.
And with full remonetisation, which he expects to complete in the next 2-3 months, the slowed down consumption and investment should bounce back.
The survey predicts a conservative rise in the national income for FY18 with a GDP growth of 6.75-7.5 per cent. Treading cautiously, it also lists many international and local downside risks to its outlook for the next fiscal.
Subramanian said the wide range in the forecast was reflective of the “uncertainties” that currently persists on both global and domestic fronts.
“Its (wide range in the forecast) partly reflecting uncertainties. There are many domestic uncertainties too. We have to see how demonetization plays out. The world is also very different, we don’t know exactly what will happen to NAFTA (North America Free Trade Agreement), what will happen to US-China relations. With so many uncertainties, we should reflect them in our forecast,” he told reporters.
The survey noted three imminent external risks that could pin down the growth predictions—rising oil prices, escalating global trade tensions and resurgence of protectionism. On the upside risk, it sees revival in the world economy growth pushing up Indian exports, which has remained low for most part of the current fiscal.
“Given that India’s growth ambitions of 8-10 per cent require export growth of about 15-20 per cent, any serious retreat from openness on the part of India’s trading partners would jeopardize those ambitions,” warned the report.
The finance ministry document, which was released a day before the Union Budget on Wednesday, said the government’s demonetisation exercise “has had short-term costs” but held the potential for long term benefits through “follow-up actions” such as “fast, demand-driven, remonetisation; further tax reforms, including bringing land and real estate into the GST, reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration”.
“These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17,” says the report authored by the CEA.
Taking a positive stance on demonetization, it states that it had the potential to reduce corruption, lead to greater digitalisation of the economy, increase savings and encourage greater formalisation; “all of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues”.
It red flagged the twin balance sheet problem — over-indebtedness in the corporate and banking sectors – and called for difficult decisions like “burden-sharing and perhaps even forgiving some burden on the private sector”.
The survey said the time was ripe for taking up the debate on Universal Basic Income (UBI), which would improve disbursement of direct benefits or subsidies to weaker sections of the society.
“The support for this idea (UBI) from all ends of the ideological spectrum suggests that this idea should enter the realm of active policy discourse,” stated the report.
Anis Chakravarty—lead economist, Deloitte Haskin & Sells LLP, said the economic survey’s growth outlook for the current fiscal was closer to his consultancy firm’s forecast of around 6.5-6.8 per cent.
“The survey too has painted a somewhat cautious picture of the future and has estimated a range of 6.75-7.5 per cent,” he said in statement issued by the MNC.
Ranen Banerjee, leader public finance and economics, PwC, feels the conservative projection of growth rate for FY 18 in the Economic Survey clearly flagged the risks that the economy is exposed to owing to emerging global protectionism and rising oil prices.
“The survey has underlined that there has been a downward impact on the GDP in current fiscal owing to demonetization. The higher growth in agricultural GDP of 4.1 per cent camouflages the negative impact of deceleration in the industrial sector GDP of 2.2 percentage points in the overall GDP growth percentage,” he said.