Economic Survey warning: Growth target difficult to meet, bullish on GST

All's not well on the fiscal side, says the second part of the Economic Survey 2016-17 tabled in Parliament on Friday.

Citing a strong rupee, farm loan waivers, transitionary hurdles from implementing the new Goods and Services Tax (GST), fiscal tightening, stagnant trade deficit, declining profits from sectors like power and telecommunications and other such challenges, it said these factors could make it tough for the government to achieve the upper end of its economic growth estimates of 6.75 per cent-7.5 per cent in the current fiscal.

"The balance of risk to growth has shifted to the downside. The balance of probability has correspondingly shifted away from the upper end of the growth forecast in February (before the Union Budget)," said Volume 2 of the Economic Survey report authored by Arvind Subramanian, Chief Economic Advisor.

The survey estimated an impact of around Rs 2.7 lakh crore on account of the farm loan waiver, if all states were to implement it and could shave off the aggregate demand by 0.7 per cent of the GDP.

The projected national income could also take a hit from 7th Pay Commission onwards, and there could be "deflationary impulses" due to a decline in the prices of non-cereal food prices. "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," said the report.

The survey listed structural reforms such as the GST rollout from July 1, the in-principle decision to privatise Air India, the ongoing rationalisation of energy subsidies and actions taken by the government to reduce stressed assets on the books of companies and banks as positives.

It also included compliance gains from GST and demonetisation as 'upside potential'.

The survey stated that the government will be able to meet the fiscal deficit target of 3.2 per cent of GDP in the current fiscal and 3 per cent in the two years after that.

The CEA's mid-term review of the Economic Survey 2016-17 has not come as a surprise to most economists.

DK Srivastava, chief policy advisor, EY India, said it was a "realistic" view as the Indian economy was "emerging from two consecutive shocks" of demonetisation and GST.

"Demonetisation affected 2-3 quarters — two quarters last year and one quarter this year. GST which will effect about two quarters in the current fiscal. This, along with appreciating rupee and a continued deficiency of private investment and export demand, has accentuated the impact on GDP growth," he said.

The EY economist said the government was unable to stimulate the economy, particularly, though capital expenditure because of the fact that the capital expenditure is constrained to remain at 1.8 per cent of the GDP for the current year and the next two years; "so, these factors actually indicate that they (estimates in the survey) are realistic in the sense of admitting that the government cannot achieve something like 7 per cent-plus growth, which is the middle of 6.75 er cent and 7.5 per cent".

Srivastava, however, believes that growth could bounce back to 7.5 per cent by 2018-19.

According to him, the marginal rise in the tax to GDP ratio on account of higher compliance derived from demonetisation and GST may not be enough to entirely accommodate government's "increase in revenue expenditure".

He said it was imperative for the government to take fiscal actions along with the Reserve Bank of India's (RBI) monetary remedies for boosting growth.

"I think monetary and fiscal policy both should play an active role. Fiscal policy can be created by further rationalising government's revenue expenditure and increasing capital expenditure. If capital expenditure is increased, it will crowd in private investment which has a very weak demand right now," said Srivastava.

He batted for another 25 basis points cut in repo rate this year, but said it would not yield much result if not accompanied by stimulation of demand from the government side.

Rishi Shah, senior economist, Deloitte India, said it was "crucial to study" how long the transitionary impact would last.

"The crucial point is how long will this transitionary impact last. That, at this point in time, will be a difficult call to make," he said.

On the currency front, Shah said a more nuanced view needed to be taken; "look at the currencies of other emerging market. We are not out of line with most of them".

KEY HIGHLIGHTS

Difficult to achieve upper end of 6.75-7.5 per cent real GDP growth predicted in January
Fiscal deficit expected to decline to 3.2% of GDP in 2017-18, compared with 3.5% in 2016-17
Fiscal outlook for 2017-18 is uncertain
Repo Rate 25-75 basis points above neutral rate
Farm loan waiver could cut economy demand by up to 0.7% of GDP; State farm loan waivers could touch Rs 2.7 lakh crore