Mid-term Survey pegs GDP growth just above 6.75%

11 August 2017

The Indian economy is unlikely to achieve the high-end of the 6.75-7.5 per cent growth projected previously for the 2017-18 fiscal due to a slew of developments like the appreciation of the rupee, lower-than-expected inflation, farm loan waivers and transitionary challenges from the implementation of the GST, says the government's Economic Survey.

The anxiety created by the deflationary impulse of the series of measures taken by the government to cleanse the economy of black money and fake currency still weighing on the economy, combined with stressed farm revenues as a result of declining prices, farm loan waivers and the fiscal tightening and declining profitability in the power and telecommunication sectors will all combine to keep economic growth under pressure, says the Mid-term Economic Survey presented in parliament today.

Examining if India is undergoing a structural shift in the inflationary process toward low inflation, 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.

According to the Survey, farm loan waivers could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock to an economy.

While the demonetisation and the government's anti-black money drive have had its impact on the informal economy and boosted the formal economy and increased demand for social insurance, particularly in less developed states, 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, the Survey noted.

The ratio of stressed companies in the power sector (defined as the share of debt owed by companies with an interest coverage (IC) ratio of less than 1 has been steadily rising this year, reaching 70 per cent, with an  associated vulnerable debt of over Rs3,60,000 crore. The telecommunication sector had its own version of the ''renewables shock'' in the form of a new entrant that has dramatically reduced prices for, and increased access to, data, thereby benefitting - at least in the short run- consumers, says the Survey.

The average revenue per user (ARPU) for the industry on aggregate has come down by 22 per cent vis--vis the long term (December 2009-June 2016) ARPU, and by about 32 per cent since September 2016.

As regards outlook for growth 2017-18, the Survey had forecast a range for real GDP growth of 6.75 per cent to 7.5 per cent for FY 2018. For outlook for prices and inflation 2017-18, the Survey notes the outlook for inflation in the near-term will be determined by a number of proximate factors, including:

  • The outlook for capital flows and exchange rate, which in turn will be influenced by the outlook and policy in advanced economies, especially the US;
  • The recent nominal exchange rate appreciation;
  • The monsoon;
  • The introduction of the GST;
  • The 7th Pay Commission awards;
  • Likely farm loan waivers; and
  • The output gap

The document says that the fact that current inflation is running well below the 4 per cent target, suggests that inflation by March 2018 is likely to be below the RBI's medium term target of 4 per cent.

The Survey, which has reviewed economic developments in 2016-17, notes that the real economy grew by 7.1 per cent in 2016-17 compared with 8 per cent in the previous year. This performance was higher than the range predicted in the Economic Survey in February.

This growth suggested that the economy was relatively resilient to the large liquidity shock of demonetisation, which reduced cash in circulation by 22.6 per cent in the second half of 2016-17. The apparent resilience was even more marked in nominal growth magnitudes because both nominal GVA and GDP growth accelerated by over 1 percentage point in 2016-17 compared with 2015-16.

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 per cent in July 2016 to 1.5 per cent in June 2017.

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. With global commodity prices recovering and the 'base effect' (low inflation in the previous year) giving an upward push, wholesale inflation perked up during FY 2017

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.

The current account deficit narrowed in 2016-17 to 0.7 per cent of GDP, down from 1.1 per cent of GDP the previous year, led by the sharp contraction in trade deficit which more than outweighed the decline in net invisibles

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 ($billion) in FY 2017 as compared to 6.2 per cent ($130.1 billion) in the previous year.

The Survey noted that the government and the RBI have taken "prominent steps" to address the twin balance sheet challenge which has boosted market confidence in the short run. Also, the removal of check posts and easing of transport constraints after Goods and Service Tax (GST) implementation can provide some short- term fillip to economic activity.

The Survey said that the balance of risk to achieving the 6.75-7.5 per cent growth has shifted to the downside.

"The balance of probabilities has changed accordingly, with outcomes closer to the upper end having much less weight than previously," it added.

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