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Economic Survey 2 flags risks to growth backs rate cuts

India August 12(IM): The second part of the economic survey for 2016-17, tabled in Parliament on Friday, flagged lurking risks to growth while asserting that there is scope for slashing interest rates to enable the economy to achieve its full potential."Optimism about the medium term and gathering anxiety about near-term deflationary impulses simultaneously reign over the economy," said the survey, authored by chief economic adviser Arvind Subramanian.

The factors fuelling optimism include implementation of GST, the decision to privatise Air India and measures to tackle the stress on bank finances as well as companies.The first part of the survey, which was unveiled a day before the February budget, had estimated the economy to grow in the 6.75-7.5% range in 2017-18."There has been an across-the-board deceleration," said Subramanian. "It is less likely than before that we will reach the upper end of the range," he added.Among the triggers for anxiety were stressed farm revenues, farm loan waivers and the fiscal tightening that it may entail and declining profitability in the power and telecom sectors. "The macro-economic challenge will be to counter the deflationary impulses through key monetary, fiscal and agricultural policies," the survey said, adding that sustaining the current growth trajectory will require action on more normal drivers of growth such as investment and exports and cleaning up of balance sheets to facilitate credit growth. It backed slashing of rates against the backdrop of declining inflation."Cyclical conditions, then, suggest that the policy rate should actually be below— not 50-100 basis points or so above—the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, more than that suggested by comparison with neutral interest rates. Also, the earlier the easing, complemented with other reform actions especially to address the twin balance sheet challenge, the quicker the economy can approach its full potential," the survey said."Moreover, even if passthrough is inadequate as some argue, there are financial stability benefits from cutting policy rates, since the reduction in the cost of funds without a commensurate decline in lending rates will help restore banks' profitability. Lower rates will also facilitate the twin balance sheet problem resolution process," it said.The survey said that farm loan waivers could reduce aggregate demand by as much as 0.7% of GDP, imparting a significant deflationary shock to an economy yet to gain full momentum. It said the fiscal outlook for the current year is uncertain and listed several downside risks. They include reduced tax revenues from nominal growth than anticipated, reduced GST collections on account of the lower GST rates compared with the pre-GST rates, transitional challenges from GST implementation, reduced spectrum receipts due to the jolt to the viability of incumbent telecom firms and higher spending from the 7th Pay Commission estimated at Rs 30,000 crore. The Centre aims to rein the fiscal deficit at 3.2% of GDP in the current fiscal year.


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