Economic Survey: Note Ban to Pull Growth Down to 6.75-7.5%

Finance Minister Arun Jaitley tabled the Economic Survey in Parliament on the first day of the Budget session.

Finance Minister Arun Jaitley. (Photo: PTI)

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.

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 Survey

The 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.

The Survey added that recorded GDP will understate impact on the informal sector.

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 Survey

The Survey noted that the weighted average price of real estate in eight major cities, which was already on a declining trend, fell further after demonetisation.

A reduction in real estate prices is desirable as it will lead to affordable housing for the middle class, the Survey added.

After Demonetisation, What?

The Survey suggests a few measures to maximise long-term benefits and minimise short-term costs.

Contrary to expectations, 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 also recommended 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 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.

(This article was first published on BloombergQuint.)