Sep 09, 2017 07:55 PM IST | Source:

Downside risks to 6.75-7.5 % growth; RBI has overestimated inflation risks, says Economic Survey

Repo rate still above 25-75 bps above neutral; farm loan waivers to cut overall demand by 0.7 pc

Gaurav Choudhury @gauravchoudhury

There were downside risks to India’s projected growth of 6.75-7.5 percent growth in 2017-18, the finance ministry’s Mid-Term Economic Survey said on Friday in a guarded forecast, indicating that multiple pain points continue to hinder growth in the broader economy amid an uncertain fiscal outlook.

The second part of the Economic Survey for 2016-17, which, besides giving an overview of India’s economy, was also critical about ad hoc state-sponsored farm loan write-offs to deal with rural distress.

It also argued in favour of interest rate cuts to aid economic revival—a stand that may run counter to the Reserve Bank of India’s (RBI’s) steadfast position ignoring calls for further lending rate cuts despite persistently low inflation

The first part of the survey presented in January had projected that the Indian economy would grow by 6.75-7.5 percent in 2017-18.

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The fiscal outlook for 2017-18 still uncertain, it said, while deflationary impulses continue to weigh on the economy.

It said that retail inflation will likely be below 4 percent by March, well within the RBI’s tolerable range. According to the Economic Survey, authored by Chief Economic Adviser Arvind Subramanian and his team, the repo rate—the rate at which banks borrow from the RBI—is currently  25-75 basis points (0.25 to 0.75 percentage points) above neutral, signalling the government’s view that it wanted the central bank to cut rates further.

Earlier this month, the RBI cut the repo rate by 25 basis points (0.25 percentage points) to 6 percent, triggering hopes of lower borrowing costs for households and the companies ahead of the festival season.

The six member monetary policy committee (MPC), headed by new RBI governor Urjit Patel, however, hinted about lurking inflation risks in the near to medium term. It also flagged concerns about the deceleration in services and industry, placing the onus on the Centre and state governments to hasten project approvals and aid private investment.

The mid-term Economic Survey, however, said that RBI has overestimated the consumer price index (CPI) by 100 basis points in six to 14 quarters.

Inflation rates have slowed to record lows and food prices have been falling. Consumer price index (CPI)—commonly referred to as retail inflation that the RBI tracks—moderated sharply to 1.54 percent in June, the lowest since the index was rebased to 2012 in a new data series.

While the recently handed out enhanced house rent allowance (HRA) for central government employees may push up inflation by 40-100 basis points, the economy lags dynamism to push inflation beyond 4 percent, the survey said.

The survey also said that farm loan waivers could cut overall demand in the economy by 0.7 percent. A string of state government-sponsored farm debt waivers that have drawn criticism from professional economists and the RBI will be keenly watched.

Economists and bankers loathe the idea of loan write-offs as these create a perverse incentive structure, distorts the loan market and puts a premium on defaults.

Barely a month into office, Uttar Pradesh Chief Minister Yogi Aditya Nath  announced a Rs 36,000 crore farm debt waiver in April, signalling the government’s intent to walk the talk on a key poll promise.

This set off demands in other states, prompting Maharashtra and Punjab to follow suit. The proximate reason for such debt write-offs are to offer a balm to distressed farmers to deal with glut and price crashes.

Bumper harvests and rising imports are primary reasons for oversupply. India’s foodgrain harvest of 273 million tonnes in 2016-17 has been the highest ever. Potato and onion farmers have been worst hit. India’s horticulture output at 295 million in 2016-17 has outstripped foodgrain output for sixth year in a row.

The survey also articulated the benefits of goods and services tax (GST) that kicked-in from July 1, stating that it will help reduces overall inflation. It also said that nominal GDP has accelerated after demonetisation and the currency recall exercise will continue to pay dividends over time.

On mounting bad loans, the survey said that public sector banks were limiting damage, rather than seeking new clients. Geopolitical developments were not as big a risk for oil prices as it was before, it said.

The second volume is a departure from the past where the survey, often described the government’s official economic report card, came as a single volume divided into two parts—commentary and outlook in the first, and statistics in the second.

The first part of the survey was tabled in the last of week of January following the budget’s advancement by a month, prompting a modification to a new construct of two volumes presented nearly six months apart.
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