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7.5 pc growth difficult in FY18, scope for RBI to lower rates: Economic Survey
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SME Times News Bureau | 12 Aug, 2017
The economy is unlikely to achieve the targeted 7.5 per cent growth in
the current fiscal due to deflationary pressures, which creates
considerable scope for the RBI to lower the monetary policy rates,
according to the mid-term Economic Survey tabled in Parliament on
Friday.
The Economic Survey 2016-17 Volume-2 said: "The forecast
for GDP reflects the greater risks to the downside. The balance of
probabilities has changed, with outcomes closer to the upper end having
much less weight than previously."
The pre-Budget Survey (Volume I) had forecast a range for real GDP growth of 6.75 per cent to 7.5 per cent for FY 2018.
The
author of the Survey, Chief Economic Advisor (CEA) Arvind Subramanian
told the media later: "We are not changing the growth forecast but
saying that it is less likely to see the outcome on the upper end of the
forecast. Balance of risks to growth has shifted to the downside."
The
Survey noted that India faces the risk of deflationary impulses owing
to stressed agricultural revenues, Twin-Balance Sheet (TBS) issue of
corporates and banks due to rising bad loans, farm loan waivers and the
fiscal tightening they would entail, could push inflation below the
Reserve Bank of India's (RBI) targeted 4 per cent by March 2018, the
Survey stated.
"If you put all the factors together, our
assessment is that the March 2018 inflation may be well on target, but
the average annual inflation for the full year will be well below
target, closer to 3 per cent rather than 4 per cent. We have
substantially overachieved on checking inflation, better than our own
targets by around 150 basis points," Subramanian said.
Thus
making a case for the RBI to go for more rate cuts in the subsequent
monetary policy reviews, the Chief Economic Advisor said: "Structural
decline in inflation rates and outlook has created scope for lower
interest rates, monetary policy."
He said that real credit growth
and all other factors pointed in the same direction of deceleration of
the economy and the cleanup of the TBS problem was necessary for the
growth to rebound.
"On the twin balance sheet perspective, it is
premature to say that growth can rebound....unless we do cleanup. Farm
loan waivers are going to be deflationary, not inflationary. The
critical assumption is that Centre will not relax fiscal borrowing limit
of states.
"In order to accommodate farm waivers, states will
either have to cut expenses or raise taxes. Example, the capital
expenditure in Uttar Pradesh has been slashed by, I think, 13 per cent
to accommodate farm loan waiver. It signifies less growth. It will
impact demand, which will be a drag on growth," he said.
The
Survey, however, also noticed a rekindled optimism on structural reforms
in Indian economy. Various factors such as launch of the Goods and
Services Tax (GST), positive impact of demonetisation, decision in
principle to privatise Air India, further rationalisation of energy
subsidies and actions to address the TBS challenge contribute to this
optimism.
The document also adds that a growing confidence that
macro-economic stability has become entrenched is evident because of a
series of government and RBI actions and because of structural changes
in the oil market have reduced the risk of sustained price increases.
"This
regime shift, thanks to the RBI, government and technology, towards
this macro-economic sweet spot will remain for a long time. Its
entrenched well for the medium and long term growth," Subramanian said.
On the deceleration in the economic growth due to demonetisation, he said: "We're nearly back to the same growth rate."
About
behaviour post note ban, he said that there has been a 20 per cent
decline in cash which as of July is about Rs. 3.5 lakh crore.
"Demonetisation
has long term benefits over the next 1-3 years. In volume, has cash
come down? It turns out, we seem to have achieved 20 per cent reduction
in equilibrium cash holding," he said.
He also said that post note ban a much higher level and pace of digitalisation has been achieved.
There
was also a spurt in new taxpayers and reported income after
demonetisation with a total of 5.4 lakh new taxpayers, 1 per cent of the
total taxpayer base, getting added.
Touching upon the financial
market confidence, he said that the asset valuation in India has taken
off with the equity market indices shooting well above historic value.
But it should not be viewed as something important as temporary
liquidity has the tendency to revert to normal levels, he added.
"The
phenomenon of asset valuation is seen around the world. It has to do
with the global excess liquidity. Valuations should not be seen as
signalling something important," Subramanian said.
Focussing on
the stressed farm revenues, he said that it was a puzzle as despite
increased output and good monsoon, agricultural income had witnessed a
reduction.
"The agriculture puzzle needs to be decoded. Reduced
farm revenues in non-cereal crops despite good monsoon. Agriculture we
have seen lot of stress. This is the first instance where there is good
output, good monsoon but revenue has come down because prices have come
down.
"Why have prices have come down? Is it because of weak demand or policy. It is unusual," he said.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
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78.25
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75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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