The Indian economy’s growth in 2017-18 is more likely to be closer to 6.5% than 7.5%, according to Chief Economic Adviser Arvind Subramanian who has outlined new downside risks to growth that have emerged since the presentation of this year’s Union Budget, in the second volume of the Economic Survey tabled in Parliament on Friday.
“We are not changing our growth forecast (a range of 6.5%-7.5% estimated in February), just saying that because of all these risks, it’s less likely that we will see outcomes towards the upper end of the forecast. The balance of risks to the growth outlook has clearly shifted to the downside and the balance of probability has correspondingly shifted away from the upper end of the growth forecast,” Mr. Subramanian said.
Demonetisation impact
Stressing that it would be premature to say that growth can rebound very quickly unless there is a ‘clean-up’ and significant ‘deleveraging’ in the Indian economy, Mr. Subramanian said there has been an ‘across-the-board deceleration in real activity since the first or second quarter of last year,’ which could have intensified owing to demonetisation of high-value currency notes by the government last November. The economy grew by 7.1% in 2016-17.
“I think it is quite telling that for the first time, many indicators – credit growth, index of industrial production, Gross Value Added, manufacturing, investment – all point to the same direction of deceleration in growth,” Mr. Subramanian said.
“There are various steps taken with medium-term benefits. The real challenge now is short-term growth and we need to bring to bear all the policy tools that we have to revive short-term growth,” he concluded.
Farm loan waivers
While refusing to get drawn into a debate on whether farm loan waivers announced by States are good or bad, he said such waivers will act as a ‘drag on growth’ rather than have an inflationary impact.
“To accommodate the loan waiver, States will have to cut down either expenditure or raise taxes which will be deflationary. This is not something I am making up. Look at the Uttar Pradesh Budget – capital expenditure has been slashed by 13% or so. That represents less demand, less growth,” he said, suggesting this could impact demand by as much as 0.7% of GDP, drag down growth in the short run and worsen States’ aggregate fiscal deficit indicators.
Another drag on growth and demand will be the rising stress in the telecom and power sectors, though triggered by events that have positive long-term implications, the Survey noted.
“There’s a new entrant in telecom reducing prices for consumers and in power, renewable (energy) shocks would help climate change in the long run. But in the short run, both are having an impact on balance sheets of companies, demand and growth,” Mr. Subramanian pointed out.
The appreciation in the rupee’s exchange rate and the high real interest rates, especially when inflation targets have been ‘over-achieved’ for nearly a year and are likely to stay below the 4% target on an average through 2017-18, are also dragging down growth, the Survey asserted, making it clear in no uncertain terms that there is considerable room for the central bank to ease interest rates.
While the RBI cut the repo rate for banks to 6% last week, Mr. Subramanian argued that there is scope to bring it as low as 4.25% to 5.25% considering the slack in the economy.
Terming the distress in the agriculture sector ‘a puzzle’ as revenues have reduced for farmers of non-cereal crops despite a good monsoon and output growth, the CEA said: “This is the first time in recent memory that you had good output and monsoon, but revenue has fallen because prices have come down by a lot. That’s a bit of a puzzle. Why have prices come down so much – because of policy that restrict market access to farmers, weak demand or liquidity. But it’s very unusual. That’s going to impact demand in the short run.”
‘Rekindled optimism’
Terming the government and the central bank’s efforts to resolve the banking system’s non-performing assets, the implementation of GST and the proposed divestment of Air India as signs of ‘rekindled optimism’ about structural reforms, Mr. Subramanian also flagged the ‘extraordinary exuberance’ in financial markets.
“Asset valuations in India have just taken off. Bond prices have gone up, reflected in lower rates on government securities. But the assets that have really gone up in value are stocks. The Sensex has shot up and our price earnings ratios are now very high, well above the historic average and close to the levels seen in 2007-08,” he said.
