India will grow at 6.75-7.5 percent in 2017-18, the Economic Survey 2016-17 said in a guarded forecast on Tuesday, tempering expectations of an early revival in the broader economy still reeling under the effects of demonetisation.
“Demonetisation will have both short-term costs and long-term benefits as detailed in the attached table,” the annual Economic Survey 2016-17 tabled in Parliament on Tuesday said.
“Briefly, the costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalization, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth,” it said.
Data released at the beginning of the month showed that the economy will likely grow at 7.1 percent in 2016-17, 0.5 percentage points slower than the previous year’s 7.6 percent expansion, underlining fears of an economy-wide cash-crunch due to demonetisation.
Projections were based on incomplete output and corporate income data, amid signs of faltering investment and weak consumer spending, leading to fears that the actual numbers could be worse.
The Economic Survey, authored by Chief Economic Adviser Arvind Subramanian and his team, also strongly advocated the roll-out of a universal basic income (UBI) scheme for the poor in India, an ambitious plan involving direct money transfers to families’ bank accounts.
It hinted at greater flexibility in fiscal deficit targets to allow for greater government spending to pump-prime the economy, cautioned against rising crude prices, and obliquely observed that Parliamentary disruptions were delaying critical reforms initiatives.
The survey’s observations and growth estimates came a day before Finance Minister Arun Jaitley presents the annual Budget for 2017-18 amid growing expectations that he will unveil measures to raise people’s spending power, boost farm income, revive investment activity and expand welfare schemes to soothe the demonetisation pain, ahead of state Assembly polls.
The Survey supported a system to transfer, to identified poor families.
The government runs a string of state-funded poverty alleviation initiatives including the food-security plan and rural jobs scheme MNREGS, but some of the rights-based programmes have not achieved the desired results because of a leaky subsidy regime.
UBI, the Survey argued, will aid better targeting of subsidies, removing wastages and plugging leakages, and help people move out of poverty faster as they will receive money directly in their Aadhar-linked bank accounts.
As people move out of poverty, the UBI can eventually replace the existing poverty alleviation schemes, subsuming a patchwork of existing welfare programmes.
DEMONETISATION’S AFTER EFFECTS
The survey acknowledged that the economy is still recovering from the after effects of demonetisation, as the sudden currency drain out shock have forced a slowdown in household spending and corporate investment.
The resultant multiplier effects have hurt the broader economy, but the survey was hopeful that the worst was over and Asia’s third-largest economy will turn the corner by March this year.
“Once the cash supply is replenished, which is likely to be achieved by end March 2017, the economy would revert to the normal. Therefore the real GDP growth in 2017-18 is projected to be in the range of 6.75-7.5 percent,” it said.
It defended the government’s move to demonetise Rs 500 and Rs 1000 notes, saying the benefits outweigh the costs.
Prime Minister Narendra Modi, in a surprise announcement scrapped Rs 500 and Rs 1000 notes, taking away their legal tender status from midnight of November 8. It triggered the world’s largest currency recall exercise, as part of the Modi-government’s move to crack down on India’s thriving black transactions and also push the country towards a “less-cash” economy.
The remonetisation will ensure that the cash squeeze is eliminated by April 2017. The cash squeeze in the meantime will have significant implications for GDP, reducing 2016-17 growth by 0.25 to 0.50 percentage points compared to the baseline of 7 percent.
“Recorded GDP will understate impact on informal sector because, for example, informal manufacturing is estimated using formal sector indicators (Index of Industrial Production),” it said.
These contractionary effects will dissipate by year-end when currency in circulation should once again be in line with estimated demand, which would also allow growth to converge to a trend by 2017-18, it said.
The Survey also called for a moving to a new public debt management roadmap, setting the stage for a significant shift in a decade-long policy practice where the government was required, by law, to pursue a rigid borrowing target over a three-to-five year period.
“Even as the basic tenets of the Fiscal Responsibility and Budget Management (FRBM) remain valid, the operational framework designed in 2003 will need to be modified for the fiscal policy direction of India of today, and even more importantly the India of tomorrow. This setting out a new vision through an FRBM for the 21st century will be the task of the FRBM Review Committee,” it said.
Jaitley is likely to announce a new medium-term fiscal policy framework in Budget 2017
He would like to contain the fiscal deficit—a measure of how much the government borrows to fund its expenses—within manageable limits.
India has budgeted to control fiscal deficit to 3.5 percent of GDP in 2016-17, bring it down to 3 percent next year and maintain it at that level the year after.
The NK Singh-panel, is learnt to have argued against bringing down the fiscal deficits to below 3 percent of GDP in the near term, allowing more elbow room to the government to stimulate the economy through greater public spending.
A government-appointed panel headed by former revenue secretary NK Singh, of which Subramanian was a member, has suggested a fresh fiscal consolidation roadmap.
The committee was set up to review the working of the FRBM Act over the last 13 years and suggest the way forward “keeping in view the broad objective of fiscal consolidation and prudence and the changes required in the context of the uncertainty and volatility in the global economy”.
Under the current practice, the target for fiscal deficit—a measure of how much the government borrows in a year to meet part of its spending needs—is determined by the FRBM Act. The law was enacted in 2003 to ensure that government does not borrow beyond a certain limit that Parliament ratifies.