Economic Survey II cuts growth forecast for FY18 to lower end of 6.75-75% range

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Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Economic Survey 2016-17 highlights

Mains level: Read Economic Survey 2016-17 carefully and note down important points, data and facts


News

Context

  • The second volume of the Economic Survey 2016-17 unveiled on Friday

Highlights of the Economic Survey 20116-17:

  1. Achieving the upper end of projections for economic growth at 6.75-7.5 per cent for FY18 may be difficult.
  2. It noted, sizeable slack in the economy; for instance, the average capacity utilisation was just 72.7% in the third quarter of last fiscal year.
  3. Survey iterated the need for “considerable” monetary easing in order to deleverage corporate balance sheets. 
  4. Authors of the survey are critical of the Reserve Bank of India for keeping the policy rates at levels that felt higher than warranted they also rebutted the government’s claims of tax buoyancy and identified new short-term risks to Centre’s fiscal outlook.

Key points in the survey

  1. Investment spending of the general government — which improved on the back of CPSEs last fiscal — is likely to decline relative to GDP this year.

Why?

  • Farm loan waivers shrank states’ fiscal space and the Centre struck a balance between counter-cyclical policy and the need to maintain fiscal credibility.
  1. More downside risk to fiscal outlook than envisaged in the Budget due to
    • Reduced tax revenue from slower nominal GDP growth
    • Reduced GST collections owing to lower-than-earlier tax rates/transitional challenges
    • Lower spectrum receipts due to the structural jolt to the viability of telcos.
  2. Declining profitability in power and telecom, which threatens to add to the twin balance sheet problem.
  3. Farm-sector stress and real exchange rate appreciation have all posed risks to growth
  4. Structural shift in underlying inflation dynamics, along with the fact that the current inflation is running below the 4% target.
  5. Apart from short-term impacts from demonetisation and the GST, the economy suffer from
    • Deficient investment and export demand, appreciating rupee,
    • Macro implications from farm loan waivers
    • Sectoral problems in the power and telecommunication sectors.
  6. These are expected to weigh down India’s growth pulse in the short-run. But we should reach closer to our potential growth exceeding 7.5% in FY19.
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