Early signs of the long-term benefits such as higher number of taxpayers from demonetisation are evident, though if this will have an effect on tax collections remains to be seen, the Economic Survey’s second volume tabled in Parliament on Friday says. Downside risks to growth have increased since the Budget, the Survey notes. Edited excerpts from the presentation of Chief Economic AdvisorArvind Subramaniam on the Survey’s broad outlook for the economy:
On demonetisation effects
Demonetisation will have long-term benefits and that long term will still depend on what happens in the next one, two or three years, but we can see early signs of potential benefits.
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The high-frequency data shows we did see a growth deceleration before demonetisation, but that continued and maybe intensified in the last two quarters of the financial year.
So, maybe demonetisation was associated with the deceleration of activity. Two-wheeler sales could be one way to consider the informal sector impact. There was a decline after demonetisation but now it’s catching up and we are almost back to where we were.
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The Reserve Bank of Indian and the government have substantially overachieved on inflation. For the last 10 months, our estimate is that we have done better than whatever target we set ourselves by about 150 basis points on an average for almost a year. Our assessment, if you put all of this together, is that by March 2018, we would be well within the inflation target and average inflation for the year as a whole would be well below target.
Even if you reach about 4% by end-March, inflation for the year as a whole, which is a more important number, that will be closer to the 3% mark.
There’s been an across-the-board deceleration in real activity since the first or second quarter of last year and I think it is quite telling that for the first time, many indicators — credit growth, IIP, GVA, manufacturing, investment — all point to the same direction of deceleration in growth. A number of countries that experienced a credit boom, growth boom and then a credit and growth collapse … India didn’t de-leverage at all. So it is almost premature to say that growth can rebound very quickly unless we clean up and do the de-leveraging.
Real interest rates are rising and are high, exchange rates are appreciating. So both from the domestic side on monetary policy and the external side, by exchange rates, we are seeing a greater drag on growth.
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. So we are not changing the growth forecast (6.5% to 7.5% for 2017-18)… just that because of all these risks, it’s less likely that we will see outcomes towards the upper end of the forecast.
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.