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Modi pegs GDP growth at 6.75%-7.5% in FY18: Economic Survey

Statesman News Service | New Delhi |

India's economy is set to expand at least 6.75 per cent this year, still making it among the fastest growing nations globally, even though the recent demonetization poses a risk to total output, the Economic Survey said on Tuesday.

The document, tabled in parliament, is a precursor to the Union Budget and details the economic achievements of the government in the past year. It is read out by President Pranab Mukherjee and authored by Chief Economic Adviser Arvind Subramanian.

“There was robust economic stability in the last one year,'' Subramanian told reporters. “India weathered the foreign currency redemption and successfully waded through volatility caused by the US Presidential elections and by the demonetization.''

In a shock move in early November, Prime Minister Narendra Modi removed the legal tender status of the 1,000 rupee and 500 rupee notes in a bid to curtail illicit cash in the economy. The surprise move sucked out 86 per cent of the $360 billion currency float and derailed economic demand from across the economy as citizens focussed on curtailing discretionary spending. 

Modi ordered all such notes to be deposited back into the banking system and placed strict limits on cash withdrawals from banks. He popularised digital payments that can be tracked. Demand has since then made a comeback and cash restrictions eased on some types of accounts. The economic impact of demonetization is yet to be calculated although estimates range from a loss of between 0.25-2 per cent of GDP.

The survey said the economy's remonetization would benefit the government and the Reserve Bank of India in the longer term as the unreturned cash would be extinguished from the liability side of the balance sheet. Overall, the document accepted that the sudden removal of cash caused job losses in the farm sector and the short-term benefits of liquidity withdrawal remained uncertain.

Subramanian emphasised the government had embarked on a process of steady fiscal consolidation as robust macro parameters such as record foreign exchange reserves and a falling current account deficit helped shore up the economic balance sheet.

The survey also highlighted two risks to India's economic ascendancy — rising global crude oil prices and the increase in global trade tensions between opposing economic blocks. India imports nearly 70 per cent of its fuel needs and that bill is the largest import item on the budget. Global prices of crude oil have nearly doubled to $53 barrel in the past one year. Should crude oil go even higher, it could cap the RBI's ability to cut interest rates, the survey warned.

The document also flagged a cautionary note by indicating that expectations of a windfall in tax revenues due to the planned introduction of the Goods And Service Tax should be kept to bare minimum. The GST Tax is India's most ambitious reform and is likely to come into effect from September.

The survey floated a balloon on providing universal basic income for all citizens but fell short of recommending its introduction immediately. The document said its roll out would be challenging but the basic economic survival would ensure that the excluded poor would be benefitted immensely. It pegged the cost at between 4-5 per cent of GDP.

The Economic Survey spent considerable time on bad loans plaguing the banking sector. 13 banks with 40 per cent of loans outstanding were “severely stressed'' and it nudged the RBI to use its excess cash to recapitalise PSU banks. In fact, the document suggested that any windfall gain from the note ban should be used to recast assets in such banks by the RBI which is “exceptionally highly capitalised.'' 

The report suggested the government set up a bad bank to hasten the resolution of non performing assets so that their drag on GDP expansion and credit growth is removed.

Highlights of Economic Survey for 2016-17


* See FY18 GDP growth in the range of 6.75-7.50%

* FY17 industrial growth seen 5.2% vs 7.4% FY16

* Rise in oil prices a risk to FY18 GDP growth forecast

* Rise in global trade tensions risk to FY18 growth

* Outlook for FY18 GST collections must be cautious

* Need to seriously consider universal basic income idea

* Universal basic income cost seen at 4-5% of GDP

* Demonetisation to have short-term costs, long-term gain

* Demonetisation led to job losses, fall in farm income

* RBI balance sheet to shrink post note exchange deadline

* Fall in real estate prices post note ban is desirable

* Lower interest rates in FY18 to boost economy

* Rise in oil prices may reduce scope for monetary easing

* Govt-backed bad bank to hasten NPA resolution

* 13 banks with 40% of India loans "severely stressed"

* Need decisive NPA resolution to avoid drag on growth

* RBI currently "exceptionally highly capitalised"

* Recommend labour, tax reforms for leather, apparel sector