By Jatin Bavishi
On 11th August, Chief Economic Advisor (CEA) of India Arvind Subramanian tabled the mid-term Economic Survey in the Parliament. This is the first time that a mid-term economic survey has been presented. Volume I was presented in January 2017 it discussed the outlook and prospects of the Indian economy. Volume II describes recent developments in the economy. This article highlights its main features.
What ails the economy?
The biggest remark was that there are downside risks to the government’s growth forecast of 6.75 to 7.5 per cent for the current fiscal year. The most important short-term impediment is the fall in farmers incomes due to lower agricultural prices. The series of farm loan waivers and other subsidies announced by State Governments to help farmers would have an adverse effect on their fiscal positions. This is expected to put brakes on capital expenditures.
The CEA estimates a 0.7% fall in Aggregate Demand (AD). Strains in the Power and Telecommunication sectors are exacerbating. The flagship program Ujjwal Discom Awas Yojana (UDAY) to rid power distribution utilities has met with mixed success. Meanwhile, the entry of Reliance Jio has disrupted the sector. It has questioned the government’s ability to raise non-tax revenues in the form of spectrum license fees.
Higher spending after the implementation of the recommendations of the Seventh Pay Commission (estimated at Rs 30,000 crore) will also be a cause of concern, the report said. Moreover, an appreciating Rupee against Dollar was seen as a factor that would hinder our export sector.
Green shoots in the economy
Apart from that, the report underscored some reasons for cheer. The factors fuelling optimism include implementation of the GST, the decision to privatise Air India, and the power vested in the RBI to tackle stressed bank finances. A strong growth in tax revenue was noted, probably owing to better monitoring.
An entire chapter has been dedicated to Climate Change, Sustainable Development and Energy. India is implementing the largest renewable energy expansion programme in the world. Most of India’s external debt indicators improved at the end of March 2017.
Some green shoots have started to appear on the trade horizon as well. World trade growth has been projected at 3.8% and 3.9% in 2017 and 2018, and Indias trade growth is also picking up.
Falling Inflation: The new evil?
Inflation is expected to stay below the RBI’s forecasted level of 2% in the medium run. Examining if India is undergoing a structural shift towards low inflation, the Survey notes that the oil market (which is the chief culprit of inflation in India) is very different today than a few years ago. There is a downward bias to oil prices or, at least the upside risks to oil prices have been capped.
Moreover, the so-called twin balance sheet problem (banks unable to lend due to rising Non-Performing Assets and Corporates unable to repay due to falling profitability) are also among the deflationary impulses. Coupled with falling commodity prices, inflation will be limited. Subdued prices can provoke economic slowdown and unemployment. As JM Keynes once said, Inflation is unjust, but deflation is inexpedient
What can be done?
It has been observed for a long time that the investment cycle of the economy has been poor. This is mainly on account of the private sector not contributing adequately to it. Typically, in a low inflation-low investment regime, interest rates should fall. The Survey put the onus on the RBI by asserting that there is scope for slashing interest rates to enable the economy to achieve its full potential. In Volume I, Subramanian had prescribed fiscal stimulus to revive investment demand. However, Finance Minister Arun Jaitley overruled his suggestion and stuck to his fiscal deficit target of 3.2%. Volume II again prescribes this same suggestion.
While the concerns may be well placed, a more nuanced approached must be adopted. Focus on boosting export sector is welcomed, but it will directly confront America first or other such protectionist policies adopted by countries. The emphasis should, therefore, be in the domestic economy rather than global. What should be of concern is that Industrial Production slowed down from 9% to 6% in the last fiscal year.
On demonetisation, the Survey remained silent on its impact on jobs and the informal sector. It blamed the lack of data for a credible response. The report is also conspicuously silent on technological disruptions confronting the economy and on joblessness masquerading behind the scenes. The Survey is basically a list of recommendations and is more of a wish list for the economy. But the fact is that it is an official assessment by the highest economic authority of the country. Hence, it deserves a careful read to get a deeper understanding of the economy.
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