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Deflationary Impulses in the Indian economy and how to tackle it: National Economic Advisory Council

The economic survey 2016 had cautioned about the build-up of deflationary impulses in the economy that are weighing on an economy yet to gather its full momentum and still away from its potential. According to it the deflationary impulses included: stressed farm revenues, as non-cereal food prices have declined; farm loan waivers and the fiscal tightening they will entail; and declining profitability in the power and telecommunication sectors, further exacerbating the TBS problem. Later former finance ministers Manmohan Singh, P. C Chidmabaram and  Yashwant Sinha also cautioned about the adverse impact of poorly designed demonitisation policy and half baked implementation of the GST. Yashwant Singh also said that legacy problems such as twin balance sheet problem and NPAs in the banking sector alone are not responsible, but there are some elements of mismanagement in the economic policies.  Hard work versus Harward argument given by the Prime Minister lost its sheen and shine as India’s growth rate slid in recent quarters and also India recorded highest unemployment in the last 5 years.

IMF Lowers India’s Growth Forecast

The International Monetary Fund (IMF) in its latest growth forecast (World Economic Outlook report, October 10) has lowered India’s growth projection to 6.7 per cent, from 7.2 per cent, in 2017, attributing it to demonetisation and introduction of GST (Goods and Services Tax). According to the IMF, growth momentum slowed in India, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the midyear introduction of the country-wide Goods and Services Tax. The World Bank also in its latest report said India’s economic momentum has been affected by disruptions from the withdrawal of banknotes and uncertainties around the GST.

But the IMF said that India is expected to regain the fastest growing major economy tag next year, despite the agency cutting down India’s projected growth rate next year to 7.4 per cent, from 7.7 per cent. The international agency projects India to grow at 7.4 per cent, with China projected to grow at 6.5 per cent in 2018.

It is notable that India according to data released by the Indian government’s Central Statistics Office (CSO) lost the tag of the fastest growing economy to China in the March quarter with a GDP growth of 6.1 per cent due to adverse effects (demand and supply side shocks of demonitisation). India’s growth further slumped to 5.7 per cent in the June quarter.

India is an emerging market and its derailment from high growth path is not going to last long because there are factors that might lift the domestic demand while the global economy is also on recovery path. Maurice Obstfeld, Economic Counsellor and Director of Research Department of the IMF also expressed optimism about India’s future growth prospects asserting that the slowdown in the economy is a “blip” in a much positive long-term picture of its economy.

World Bank also lowers India’s growth forecast

A day after the IMF lowered India’s growth forecast, the World Bank on October 11 said India’s GDP may slow from 8.6 per cent in 2015 to 7.0 per cent in 2017 because of disruptions by demonetisation and the GST. According to the World Bank, “Real GDP growth slowed to 7.1 per cent in 2016, from 8 per cent in 15/16, and further to 5.7 per cent in Q1 FY2017.”

The World Bank has forecast and warned that subdued private investment due to internal bottlenecks could put downside pressures on the country’s potential growth. The World Bank said in its South Asia Economic Focus, a biannual economic update that India’s economic momentum has been affected by disruptions from the withdrawal of banknotes and uncertainties around the Goods and Services Tax (GST). As a result, growth is expected to slow from 8.6 per cent in 2015 to 7.0 per cent in 2017. Sound policies around balancing public spending with private investment could accelerate growth to 7.3 per cent by 2018. The World Bank suggested that while sustained growth is expected to translate to continued poverty reduction, more focus could be made to help benefit the informal economy more.

Last week, the World Bank had termed the slowdown in the economy as “aberration” mainly due to the temporary disruptions in preparation for the GST. World Bank President Jim Yong Kim also said that the Goods and Services Tax (GST) is going to have a hugely positive impact on the Indian economy. According to him deceleration in the first quarter is mostly due to temporary disruptions in preparation for the GST, which by the way is going to have a hugely positive impact on the economy. It may be noted that in January 2017 the World Bank had downgraded India’s growth forecast as sharp falls in the country’s automobile and real estate sales flagged the short-term impact of recalling India’s two most-used bank notes (Rs. 00 and 1000 denominations). However, it had predicted India’s economy would grow by a “still robust” 7% in the fiscal year to March 2017 – a 0.6% drop from its earlier forecast, but still the fastest rate of any major economy in the world. According to the World Bank forecast then, advantages of low oil prices and solid agricultural output were partly offset by challenges associated with the withdrawal of a large volume of currency in circulation and subsequent replacement with new notes.

Economic slowdown a concern: Economic Advisory Council

The Economic Advisory Council to the Prime Minister (EAC-PM) in its first meeting October 11 stressed on the need to “accelerate economic growth and employment over the next six months. It identified 10 areas on which it will prepare reports and make recommendations to the government over the next few months. The ten areas on  EAC would prepare reports ten themes including economic growth; employment and job creation; informal sector and integration; fiscal framework; monetary policy; public expenditure; institutions of economic governance; agriculture & animal husbandry; and, patterns of consumption & production and social sector. The EAC includes Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister (EAC-PM) and other members, viz,  Surjit Bhalla and Rathin Roy, along with Ratan Watal, principal advisor, Niti Aayog, as member secretary. The Advisory Council also recognised the need for instituting an Economy Track Monitor, using lead indicators and triggers for action, based on informed assessment and analysis. While constituting the EAC last month, the government said the Council can up issues “either suo-motu or on reference from the Prime Minister or anyone else.”

In the EAC meeting Chief Economic Advisor Arvind Subramanian made a presenstation to the Advisory Council and focused attention on accelerating economic growth, including investments and exports-using a combination of different policy levers. EAC member Rathin Roy said that “the consensus is there is economic slowdown, we will examine its causes”. The Council wants the government to stick to its fiscal consolidation road map and has suggested that stimulus to the industry should not be at the cost of fiscal prudence.

The EAC was reformulated after reports of economy skidding to lower growth were criticized by the opposition parties and many experts. The constitution of the EAC-PM came in the backdrop of growing concerns over the pace of growth in the economy and the slow pace of job creation. In the quarter April to June 2017, the GDP growth fell to 5.7 per cent from 7.9 per cent in the corresponding period last year. The reduction in growth came despite the government stepping up expenditure in the initial months. In 2014, the NDA government had disbanded the PMEAC which was earlier headed by former Reserve Bank of India governor C Rangarajan. The Economic Advisory Council to the Prime Minister was first constituted by the then prime minister Manmohan Singh on December 29, 2004, under the chairmanship of C Rangarajan. The work of the council included offering advice to the Prime Minister on policy matters from time to time. Besides, it also prepared a monthly report on economic developments at home and abroad for the Prime Minister.

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