Economic Survey 2016-17 Volume-2: Inflation to Be Below 4% Target; Downside Risks Predicted This Fiscal

New Delhi, August 11: Union Finance Minister Arun Jaitley on Friday tabled the second volume of the Economic Survey for 2016-17 in Lok Sabha. The survey contains updated macroeconomic data and notices a rekindled optimism on structural reforms in Indian economy. The survey highlights uncertain fiscal outlook for the current fiscal year and states that inflation is expected to remain below 4 per cent target until the end of the fiscal year. The survey gives a picture that GDP forecast for 2017-18 fiscal faces downside risks of 6.75-7.5%.

The Economic Survey Volume 2, drafted by Chief Economic Advisor Arvind Subramanian informs that deflationary impulses are weighing on the economy. The document says that the fact that current inflation is running well below the 4 percent target, suggests that inflation by March 2018 is likely to be below the RBI’s medium term target of 4 percent. Subramanian is believed to hold a press conference later in the day to explain the main contours of the Survey.

The document also adds that a growing confidence that macroeconomic stability has become entrenched is evident because of a series of government and RBI actions and because of structural changes in the oil market have reduced the risk of sustained price increases. The various factors that contribute to the rekindled optimism include the launch of the GST; Positive impacts of demonetization; decision in principle to privatize Air India; further rationalization of energy subsidies and Actions to address the Twin Balance Sheet (TBS).

However, the Survey cautions that anxiety reigns because a series of deflationary impulses are weighing on an economy, yet to gather its full momentum and still away from its potential. These include stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power and telecommunication sectors, further exacerbating the TBS problem.

The Survey notes that the oil market is very different today than a few years ago in a way that imparts a downward bias to oil prices or at least has capped the upside risks to oil prices. Also, farm loan waivers could reduce aggregate demand by as much as 0.7 percent of GDP, imparting a significant deflationary shock to an economy. The spurt in New Tax Payers and Reported Income After Demonetization; 5.4 lakh New Tax Payers Post-Demonetization. Demonetization’s impact on the informal economy increased demand for social insurance, particularly in less developed states.

MGNREGS and its implementation by the Government have met the programme’s stated role of being a social safety net during times of need. It also adds 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.

Reviewing of Economic Developments 2016-17, the Survey notes that;

Real economy grew by 7.1 per cent in 2016-17 compared with 8 percent the previous year.
The Fiscal deficit is expected to go down to 3.2 per cent of GDP in FY2018 compared with 3.5 per cent in FY2017.
Economy relatively resilient to the large liquidity shock of demonetization which reduced cash in circulation by 22.6 percent in the second half of 2016-17.
Structural reform agenda include implementing GST, Air India privatisation, further rationalization of energy subsidies, addressing twin balance sheet challenges facing banks.
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 percent in June 2017.
House rent allowance may push CPI by 40-100 bps while Private banks’ loan growth more robust than that of PSU banks
The sharp dip in WPI inflation in late FY 2015 and throughout FY 2016 owed to the deceleration in global commodities prices, especially crude oil prices.
The current account deficit narrowed in 2016-17 to 0.7 percent of GDP, down from 1.1 percent of GDP the previous year, led by the sharp contraction in trade deficit which more than outweighed the decline in net invisible
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 FY 2017 as compared to 6.2 per cent (US$ 130.1 billion) in the previous year.
With the 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.