Future bright, if polity bites the bullet: Economic Survey 2017

New Delhi: The macroeconomic outlook for the Indian economy, despite some worrying global headwinds, is stable, says the country’s annual economic stock-taking report.

It punches a hole in the claims made in some quarters that India is in a tough spot.

The Economic Survey 2016-17, tabled in Parliament on Monday, sets out probably the best macroeconomic backdrop ahead of any of finance minister Arun Jaitley’s previous budgets.

While the survey is optimistic, it still reflects an air of disquiet on the inability of the polity to inspire tougher decision making, something that is now beginning to constrain India’s ability to realize its growth potential and which is critical to generate resources to address growing social concerns.

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“Looking further ahead, societal shifts in ideas and narratives will be needed to overcome three long-standing meta-challenges: inefficient redistribution, ambivalence about the private sector and property rights, and improving but still-challenged state capacity,” said the Survey.

Implicitly it is arguing that a larger political discourse is imperative to manage a societal mindset reset—like when the government initiated demonetisation of high-value currency notes on 8 November—and that the window to roll out this long overdue policy change is shrinking.

The Survey, authored by chief economic adviser in the finance ministry Arvind Subramanian, projected the economy to grow in the range of 6.75-7.5% in fiscal year 2017-18, post-demonetisation. It said demonetisation may shave off around 0.25-0.5 points from a baseline growth rate of 7% in 2016-17.

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The statistics department has projected the economy to grow 7.1% in 2016-17 without taking into account the impact of demonetisation, while the International Monetary Fund has pared its growth projection for India to 6.6% in 2016-17 and 7.2% in 2017-18.

However, the survey warns of significant downside risks to its growth forecast for next fiscal. First, there is uncertainty to the extent to which the effects of demonetisation could linger into next year, especially if uncertainty remains on the policy response. Geopolitical tension may also lead to higher oil prices and possible eruption of trade tensions may further shrink world trade.

The survey forecast a delicate fiscal situation for the next financial year, with the gains from lower oil prices and higher excise duties set to vanish. It estimated excise-related taxes to decline by about 0.1 percentage point of gross domestic product next year, a swing of about 0.6 percentage points relative to 2016-17. The fiscal gains from implementing the goods and services tax and demonetisation may not be fully realized immediately.

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Over that, muted non-tax revenues and allowances granted under the 7th Pay Commission could put pressure on the fiscal deficit, or gross borrowings of the government. While the survey said a possible special dividend from the Reserve Bank of India to the government on unreturned currencies and higher tax collections through the income disclosure schemes will provide a one-time boost to revenues, the magnitude of both remain uncertain.

Shubhada Rao, chief economist at Yes Bank Ltd, said the Survey presents a pragmatic view of India’s macroeconomy in the light of complex domestic and global dynamics. “While it recognizes that fiscal policy must be designed in line with India’s changing developments, it remains cognizant of keeping the balance between growth and fiscal control. In the upcoming FY18 Union budget, we expect the finance minister to remain on the path of fiscal consolidation,” she added.