The government's Economic Survey released on Tuesday has projected a growth rate of 6.75-7.5 percent for the economy in 2017-18, while taking note of the impact of demonetisation on near-term economic activity.
The projected growth rate for next fiscal compares with the government's official estimate of 7.1 percent growth in the current year. The Economic Survey, however, said that growth for fiscal 2017 will be 0.25-0.50 percent below the baseline scenario of 7 percent.
Giving the break-up of growth likely in the current year, the Economic Survey said that the industrial sector is likely to grow by 5.2 percent in fiscal 2017 compared to 7.4 percent in the previous year. The agriculture sector is likely to see strong growth after a good monsoon and is seen expanding at 4.1 percent in fiscal 2017 compared to 1.2 percent last year. The service sector is estimated to grow at 8.9 percent in 2016-17, almost the same as in 2015-16.
GDP growth in 2017-18 is projected at 6 ¾ to 7 ½ percent Post-demonetisation: #EconomicSurvey; Press Releases at https://t.co/27ruDsQFCM pic.twitter.com/09JOZ13NgR
Also Read: Economic Survey Bats For Fiscal Conservatism But Seeks Changes In Operational Framework
Demonetisation Fallout
Detailing its assessment of the impact of demonetisation, the Economic Survey said that it will have both short-term costs and long-term benefits.
The costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalisation, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth.Economic SurveyThe Survey analysed incoming high frequency indicators like two-wheeler and car sales along with tax collections and noted the following:
- Passenger car sales and excise taxes bear little imprint of demonetisation
- Property markets in the major cities and sales of two-wheelers show a marked decline
- Weakness in credit growth reinforced after demonetisation
- Recorded GDP will understate impact on the informal sector
The balance of evidence leads to a conclusion that real GDP and economic activity has been affected adversely, but temporarily by demonetisation.Economic SurveyThe decision to withdraw currency notes of Rs 500 and Rs 1,000 was announced on November 8 and led to a withdrawal of 86 percent of the currency in circulation. The currency crunch that followed impacted transaction activity across sectors like retail and real estate, among others. The replacement of currency has been slow. As of January 20, currency in circulation stood at Rs 9.87 lakh crore, according to the Reserve Bank of India (RBI).
“Remonetisation will ensure that the cash squeeze is eliminated by April 2017,” said the Economic Survey.
These contractionary effects will dissipate by year-end when currency in circulation should once again be in line with estimated demand, which would also allow growth to converge to a trend by FY17-18.Economic SurveyAlso Read: Economic Survey Moots Universal Basic Income To Replace Existing Subsidies
How Demonetisation Could Impact The Economy
- Aggregate demand shock: Becauseit reduces the supply of money andaffects private wealth
- Aggregate supply shock: To the extentthat economic activity relies on cashas an input
- Uncertainty shock: Because economicagents face imponderables related tothe magnitude and duration of thecash shortage and the policy responses
The Quantum of Impact
In trying to assess the quantum of impact on growth, the Economic Survey used a model relating money to GDP, which builds in assumptions of the use of cash in the economy and the shift towards digital payments.
Using this model, the Survey assessed that the nominal GDP growth estimate of 11.25 percent for the current year would be impacted by 0.25-1 percentage point. This, in turn, would imply a 0.25-0.50 percentage point hit to the real GDP estimate of 7 percent.
After Demonetisation, What?
Contrary to suggestions that a cash shortage be maintained to push the economy towards digital payments, the Survey said that remonetisation should be completed quickly and that withdrawal limits should be eliminated as early as possible. This would reduce GDP growth deceleration and cash hoarding, the Survey added.
It said that digitisation of payments be continued but added that the transition should be gradual and based on incentives rather than controls.
Importantly, the Survey recommended that land and real estate be brought into the Goods and Services Tax (GST) fold. It added that a reduction in tax rates and stamp duties is essential.
“And finally, an improved tax system could promote greater income declaration and dispel fears of over-zealous tax administration,” said the Economic Survey.
It went on to paint an optimistic picture of the economy over the medium term, should the government be able to capture potential gains from demonetisation and the implementation of the GST.
Over the medium run, the implementationof the GST, follow-up to demonetisation,and enacting other structural reforms shouldtake the economy towards its potential realGDP growth of 8 percent to 10 percent.Economic SurveyEssential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
