New Delhi: A raft of deflationary impulses is weighing on the Indian economy, which is likely to fall short of the 7.5% upper band of its forecast growth range this year, according to the second volume of the Economic Survey presented by finance minister Arun Jaitley in Parliament on Friday.

Farmers’ incomes stressed by lower non-cereal food prices, farm loan waivers and the consequent fiscal tightening by state governments, and strains in the power and telecommunication sectors that are exacerbating the so-called twin balance sheet problem are among the deflationary impulses that will limit economic growth in the short run, the Survey said.

The twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that have piled up at banks because of the inability of borrowers to repay.

The Survey, anchored by chief economic adviser Arvind Subramanian, said the deflationary impact this year could be as much as 0.35% of gross domestic product (GDP). It cited the example of Uttar Pradesh, which has slashed capital expenditure by 13% to accommodate a Rs36,359 crore loan waiver.

The first volume of the Economic Survey released in January had projected the economy to grow in the range of 6.75-7.5% in 2017-18 against 7.1% in 2016-17.

With monetary policy having been tighter than assumed and the rupee having appreciated against the dollar, the balance of risk has shifted to the downside and it is unlikely that the upper band of the projected growth rate will be achieved, the second volume warned.

That implicitly shifted a part of the blame for slower growth to the doors of the Reserve Bank of India, which cut its key policy rate by 0.25% in August after resisting calls for a reduction in four consecutive monetary policy reviews by citing inflationary risks. Inflation slowed to a record-low 1.54% in June.

GDP growth slipped from 7.7% in the first half of 2016-17 to 6.5% in the second half. The slowdown in GDP indicators predated the demonetization of high-value banknotes in November, but intensified in the post-demonetization period, the Survey said.

The Survey’s acknowledgment of slowing growth is candid and realistic, said D.K. Srivastava, chief policy adviser at consulting firm EY India.

“We should reach closer to our potential growth, exceeding 7.5% in FY19," he said.

Structural reforms such as the goods and services tax (GST) and a larger tax base in the aftermath of demonetization may boost economic growth in the medium term, the Survey said.

India is undergoing a structural shift toward low inflation, mostly due to changing dynamics in the oil market, which has capped upside risk, according to the Survey.

“More recently such shifts seem to have been missed, for example, in the last 14 quarters, inflation has been overestimated by more than 100 bps (basis points) in six quarters with an average error of 180 bps," it said. One basis point is one-hundredth of a percentage point.

On the impact of demonetization, the Survey said it had increased demand for social insurance such as the rural job guarantee scheme, particularly in less developed states. It remained silent on demonetization’s impact on jobs and the informal sector, blaming a lack of credible data.

The Survey highlighted a rekindled optimism on structural reforms in the Indian economy, citing implementation of GST, the decision in principle to privatize Air India, rationalization of energy subsidies and action taken to address the twin balance sheet problem.

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 said. The Survey suggested allowing, in some cases, majority private sector ownership of under-performing public sector banks.

The Survey said overcoming the near-term demand shortfalls will be critical and suggested that “important policy choices" need to be considered, such as the timing and magnitude of monetary easing and the magnitude and composition of fiscal consolidation in the context of commitments made.

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