Economic Survey-Volume II- Chapter 1 - Part 2 (1)...•Farm loan waivers are more likely to be deflationary than inflationary and hence impart a downward not upward bias to prices

Chapter1

VolumeII

Copyright@StudyIq Education

Chapter 1Introduction

SectionA.AnalyticalreviewofrecentdevelopmentTheGoods&ServicesTax

ParadigmShifttoLowInflationWedgebetweenassetprice&realeconomyFarmLoanWavers- MacroEconomicImpact

Demonetization:LongTermBenefits&ShortTermCostSectionB.Outlook&policiesfor2017-18

SectionC:ReviewofDevelopmentin2016-17


Outlook & Policies for 2017-18


Outlook for Real Activity for 2017-18

Forsometimenow,Indiahasbeeninthethroesofwhat CarmenReinhartandKennethRogoffhavecalledbalancesheet“recessions”("weakerthanpotentialgrowth"ratherthan"recessions"isamoreappropriatecharacterizationforIndia).



Para1:Credit&InvestmentLegacy

GeneralScenario• Inmostcountries,boomsareaccompaniedbyrapidincreases increditgrowth,followedbydeleveraging(orcreditdecline) afterwhichcreditgrowthcannotnecessarilywillpickup.

• Chinahasfollowedadifferentpath:ithaschosentore-leveragewithavengeanceinordertostaveoffagrowthslowdown.

• Thisworksintheshortrun,althoughattheexpenseofdecreasingcapitalefficiencyandbuildingupfinancialsectorvulnerabilitiesthatcouldleadtodramaticgrowthslowdownsinthefuture.



IndianScenario• Indianboomofmid2000isnotfollowedbyseriousdeleveraging.• Slowdowninbankcreditisthesourceofconcern.• IfdeleveragingisnecessaryconditionforresuminggrowththanIndianeedsmoredebtresolutionandreduction—intheshortrun.



Para2:CurrentSituationofIndianEconomy

• A numberofindicators—GDP,coreGVA(GVAexcludingagricultureandGovernment),IIP,credit,investmentandcapacityutilization— pointtoadecelerationinrealactivity.

• RealGVAgrowthforQ42016-17was5.6percent.• Unlesspotentialoutputgrowthismuchlowerthanis

commonlyassumed(around7percentormore),outputgapsareexpectedtowiden.



Para3:ExpectationinVolumeIofEconomicSurvey

• VolumeIrangeforGDPgrowthofbetween6.75and7.5percentfactoringin–• Morebuoyantexports• Postdemonetizationcatchupinconsumption• Relaxationofmonetaryconditionswhichprevailedduring

demonetization.



Para4:Presentfactorsaffectingtheexpectations

• Deflationarybiasisexpectedineconomyreasonbeing-ü Realexchangerateappreciation.ü Farmloanwaiversü Increasedstresstobalancesheetinpower,

telecommunicationandagriculturalsector.ü TransitionalChangesimplementingtheGST



Para6- Effectoffarmloanwaiver

• ThedeflationaryimpactoffarmloanwaiverwilldependuponhowmanystatesimitatethesameactionasUP,Mahrashtra,MP&Karnataka.

• Deflationaryimpactisexpectedtobe0.35%duetothefarmloanwaiving.



Para7- MonetaryPolicyandit’seffect

• RealpolicyrateistighterthanwhatwasexpectedinVolumeI.

• ItisexpectedthatifcurrentmonetarypolicywillcontinuethenforecastedGDPwillshowadownsiderisk.



Para8- TBSandProspects• SincetheVolumeIGovernment&RBIhastakenvariousstepsto

resolvetheTBSproblem.• MarketConfidencehasboosted.• Deleveragingthecorporatebalancesheetswillbenecessarytorestore

investment&creditdemand.• Deleveragingofbankbalancesheetswillbeessentialtounblockthe

chokedchannelsofthesupplyofcredit.• However,thesubstantivegrowthimpactofthestepstakenwill

dependonthescope,effectiveness,andtimelinessof resolutionofstressedassets.



Para9- GSTEffectsThereisalsosomeupsidefromtheGST.Theremovalofcheckpostsandtheconsequenteasingoftransportconstraintscanprovidesomeshort-termfillip toeconomicactivity.



Para10- Conclusion• InVolumeIgrowthinGDPwasexpectedtobe7%

from6.75%.• Buttheprecedingdiscussionindicatesthatthe

balanceofrisksseemtohaveshiftedtothedownside.• Thebalanceofprobabilitieshaschangedaccordingly,

withoutcomesclosertotheupperendhavingmuchlessweightthanprevious.


Outlook for Price & Inflation for 2017-18

Thesectionon‘ParadigmShifttoLowInflation’arguedthatIndiamightalreadybeinthethroesofastructuraldisinflationaryshift,drivenbymorepermanentdevelopmentsinboththeinternationaloilmarketanddomesticagriculture reflectedinunanticipatedinflationdevelopments.


Para1– AnticipatedInflationaryTrend

Outlook for Price & Inflation for 2017-18Para2– Headline&CoreCPI

RBI’snewlyadoptedFlexibleInflationTargetingframework:HeadlineCPI- Measurestargetrateofinflationindicatingpriceofessentialconsumotion goodsandgoodshavinghighlyvolatileprices.Inflationinthesepriceshurtsthelowerincomegroup.CoreCPI- Representslongterninflationtrendofeconomy.Itignoresfoodproductsandallsuchproductofwhichpricesarevolatilelikeoil.

Thisisdonetoseparatepermanentandtemporaryinflationmovements.

Outlook for Price & Inflation for 2017-18Para3– DeterminersofInflationinNearTerm

• Capitalflowsandexchangerateswhicharedependentupontheoutlook&policiesofadvancedeconomiesspeciallyofUS.

• Recentexchangerateappreciation• Themonsoon• TheGSTimpacts• The7th PayCommissionAwards• LikelyFarmLoanWaivers• Theoutputgap


Outlook for Price & Inflation for 2017-18OtherImportantIssues

• Foodpricesareexpectedtobeonhighersideandveryencouragingduetotheanticipatedbetterrainfallthanpreviousyears.

• TheGSTisexpected,onbalance,toreducepricesbecauseofthelowerincidenceoftaxationcomparedtothecombinedincidenceofcentralandstatetaxespreviously.

• The7thPayCommissionhousingawardisexpectedtoincreaseinflationonaveragebybetween0.4and1.2percentagepoints,dependingonwhetherjusttheCentreortheCentreandallthestatesimplementtheaward.


Outlook for Price & Inflation for 2017-18OtherImportantIssues

• Farmloanwaiversaremorelikelytobedeflationarythaninflationaryandhenceimpartadownwardnotupwardbiastoprices.

• Outputgapsareimportantforinflationandtheearlierdiscussionpointstoaweakeningeconomyandwideningoutputgaps.


PolicyInstances


MonetaryPolicy

ThreemainfeatureshavecharacterizedtheMonetaryPolicysincereleaseofVolumeI:

1.RealInterestratesarecurrentlyhigh.2.UnusualvolatilityinG-SecRatesofBonds.(Chapter3)3.Glutofliquidityinbankshaspersistedforabout9months.(Chapter3)


Ratesarealsosubstantiallyhigherthanincomparableemergingmarketcountries.

NominalNeutralRate&RepoRateNormalorneutralinterestratesarethosethatprevailwheninflationisclosetotargetandrealGDPclosetopotential.

Attargetedinflationrateof4%;neutralinterestratemustbebetween5.25-5.75%butthepresentrateis6%whichshowsadeflationof25-75Basispoints.

Currentinflation,at1.5percent,isrunningwellbelowthe4percenttarget,withthedomesticeconomylackingthedynamismtopushthisbacktowardthetarget.Example:CapacityutilizationinQ3of2016-17is72.7%.

Itissuggestthatthepolicyrateshouldactuallybebelow—not50-100basispointsorsoabove—theneutralrate.


Conclusion:

• Thescopeformonetaryeasingisconsiderable,morethanthatsuggestedbycomparisonwithneutralinterestrates.

• Theearliertheeasing,complementedwithotherreformactionsespeciallytoaddresstheTBSchallenge,thequickertheeconomycanapproachitsfullpotential.

• RealRateswhichaffectthedecisionofconsumerandinvestorsareyearlyaveragenotwhatisatthecertainpointoftime.

• In2016-17theaverageinflationratewas1.8%,evenifin2017-18wereachthetargeted4%theaveragewillbe3%.

• Stillthepolicyinterestrateissubstantiallyhigherthantargetedinflationrate.


LendingRate,BaseRate&PolicyRates(RepoRates):

Argumentagainsteasingreporate:Whyreporateshouldbereducedifbaseratedoesnotreduceaccordingly.Baseratedeclinesby80bp incomparisonwith175bp ofpolicyrates.

Answer:• Therearefinancialstability benefitsfromcuttingpolicyrates• Thereductioninthecostoffundswithoutacommensuratedeclineinlendingrateswillhelprestorebanks'profitability.

• LowerrateswillalsofacilitatetheTBSproblemresolutionprocess.• Thesereductionsinlendingratesbenefitallborrowers,includingsmallandmediumenterprises(SMEs).


FiscalPolicy

Thefiscaloutlookforthisyearisuncertain.Downsiderisk otherthanthosediscussedinbudgetpreviouslyinclude:

• Reducedtaxrevenues fromslowernominalgrowththananticipated.• ReducedGSTcollectionsonaccountofthelowerGSTratescomparedwiththepre-

GSTtaxes,andtransitionalchallengesfromGSTimplementation.• Reducedspectrumreceiptsonaccountofthestructuraljolttotheviabilityof

incumbentfirms.• Higherexpenditures fromthe7thPayCommissionestimatedatRs.30,000crore.

A SlightupsidetrendmayalsobeseenbypositiveaspectofGSTimplementationandtaxcompliancepoliciesbythedemonetizationprocess.


OtherPolicies• Agriculturalstresswillneedappropriatepolicyresponses.• Giventhat2017willalsobeayearofsurplusratherthanscarcity,andtotheextentthatfirminguppriceswillbeessentialtoboostagriculturalincomes.

• Situationofcobwebcyclemayariseifagricultureissuesnotseenproperly.

• Properremunerationpolicy,stableMSPandeasyaccesstoexportmarketwillprotectbothproducersandconsumersfromproduction&priceswings.


CobwebCycle

• CobwebCycleisfeaturedbymarketinwhichsupplybyproducerdependsuponthepricesinthepreviousperiod.

• Itisthebasiccharacteristicofthemarketinwhichtimegapbetweenproductionandsellingislarge.

• Whattoproduceinnextyearisdependentonpreviousyears’experience.

• Forexample,ifpulses’pricesareparticularlyhighinagivenyear,morefarmerswillchoosetoplantpulsesthenextyeartotakeadvantageofthehighprice.Thisincreasedsupply,however,willleadtolowerprices.


OtherPoliciesAlltheimpedimentsthatcomeinthewayofrealizingbetterpricesforfarmers—stocklimitsimposedundertheEssentialCommoditiesAct,exportrestrictions,impedimentstotheimplementationofe-NAM—needtoberemoved.

NationalAgricultureMarket(NAM)isapan-IndiaelectronictradingportalwhichnetworkstheexistingAPMC(AgricultureProduce&MarketCommittee)mandis tocreateaunifiednationalmarketforagriculturalcommodities.

Thetimeisalsoripetoconsiderwhetherdirectsupporttofarmerscanbeamoreeffectivewaytoboostfarmincomesovercurrentindirect,Ineffective,andinefficientformsofsupport.


Documents

Economic Survey-Volume II- Chapter 1 - Part 2 (1)...•Farm loan waivers are more likely to be deflationary than inflationary and hence impart a downward not upward bias to prices