Five months after the Economic Survey 2016-17 was released, Chief Economic Adviser Arvind Subramanian has presented the second volume of the annual economic review-cum-prognosticatory report. With the intervening period having provided a wealth of data points and policy developments, including the momentous roll-out of the Goods and Services Tax, there was a clear need to update and refresh outcomes and forecasts. And his outlook for growth in the current financial year has clearly turned more sombre. While Volume I had projected the gross domestic product expansion in 2017-18 in a range of 6.75-7.5%, the CEA has had to take cognisance of several new factors that have contributed to his diagnosis: “that the balance of risks seem to have shifted to the downside” with a far lower likelihood of growth being “closer to the upper end”. A quick look at each of the risks that Mr. Subramanian has cited shows it is going to be hard to find a ‘magic bullet’ fix that encompasses most of the concerns. For instance, the continuing appreciation of the rupee’s real exchange rate means exporters are increasingly going to find themselves struggling to compete on pricing against competitors from countries whose currencies have weakened against the dollar and the euro. And this even while the recovery in global trade demand is still to acquire more robust momentum. Another dampener, according to the CEA, would be the increasing stress to balance sheets that companies in the power and telecom sectors have to contend with, and the deflationary bias to activity that such stress would impart.
Besides its long-term structural benefits, the implementation of the GST, says Mr. Subramanian, would also straightaway provide a short-term impetus by easing a cross-country logistics constraint following the removal of checkposts. And yet, the transitional challenges from the actual operation of the new indirect tax regime could feed into the mix of factors retarding momentum. Pointing to other factors including the farm loan waivers and agricultural stress that pose risks to the growth outlook, the survey posits that as part of the government’s remedial responses “policy must be driven by the recognition that, over longer horizons, there is no necessary opposition between farmer and consumer interests.” Backed by procurement, remunerative and stable support prices can help ensure that the risk of wild swings in the production and prices of farm produce is obviated, thus protecting both farmers and consumers. The CEA makes bold to recommend that the “time is also ripe to consider whether direct support to farmers can be a more effective way to boost farm incomes.” Ultimately, he argues, quick and considerable monetary easing by the RBI — with policy rates cut to about 4.25-5.25% from the current 6% — could help the economy approach full potential and aid in resolving the issue of stressed balance sheets.