Slump before growth peaks: Economic Survey

New Delhi: India’s growth rate will slow by up to half a percentage point due to demonetisation, but will rebound the next financial year, the government’s pre-Budget Economic Survey said on Tuesday.

It forecast that the economy would grow 6.5 per cent to 6.75 per cent in the year to March 2017, down from 7.9 per cent the previous financial year. It will rebound in 2017-18 to 6.75 per cent to 7.5 per cent, making India the fastest growing major economy in the world, the survey report said.

It warned that remonetisation should be completed expeditiously, and called for reduction in tax rates and stamp duties to minimise the costs of demonetisation.

This is the first official estimate of India’s gross domestic product (GDP) for 2016-17 after the last year’s demonetisation move, indicating that the economy has taken a less severe impact of cash crunch than estimated by various analysts, including former Prime Minister Manmohan Singh and the International Monetary Fund (IMF).

The IMF had said that growth would be down by a full percentage point, and Dr Singh had warned a knock-off impact 2 percentage points on India’s GDP due to Prime Minister Narendra Modi’s decision to junk old Rs 500 and Rs 1,000 notes on November 8, 2016.

However, the survey report admitted that its estimates might not have fully captured the impact of demonetisation as “it doesn’t record economic activity in the informal sector where majority of Indians are employed.” “But the costs of demonetisation have nonetheless been real and significant,” it said.

The survey said that interest rates and dampened price pressure might have cushioned the short-term macroeconomic impact.

The survey was upbeat as it hoped that remonetisation exercise would eliminate cash squeeze by April 2017. “Nearly 90 per cent of transactions demand can be met before the end of the year,” it said.

It said that consumption was expected to receive a boost from two sources: catch-up after the demonetisation-induced reduction in the last two quarters of 2016-17; and cheaper borrowing costs, which are likely to be lower in 2017 by as much as 75 to 100 basis points.

“As a result, spending on housing and consumer durables and semi-durables could rise smartly,” said the survey, a status report and an outline for the future rolled into a single document.

The survey has been prepared by a team led by chief economic adviser Arvind Subramanian, and was tabled in Parliament soon after the customary address by President Pranab Mukherjee to mark the beginning of the Budget Session. Analysts said that Budget  could announce tax cuts to boost economic growth. It said India was one of the few economies enacting major structural reforms including, the GST.

The survey admitted that India had to traverse a considerable distance to realise its ambitions on growth, employment and social justice.

On challenges to the economy, it pointed towards increase in oil prices, weak private investment and slow exports growth. “The steady progress on structural reforms made in the last few years needs to be rapidly built upon, and the unfinished agenda completed. Especially after demonetisation and given the ever-present late-term challenges, anxieties about the vision underlying economic policy and about the forgoing of opportunities created by the sweet spot need to be decisively dispelled.”