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Economic Survey warns of dangers of sustained deflation

Economic Survey warns of dangers of sustained deflation”

The government has tabled the second volume of Economic Survey 2016-17 at the parliament on Friday August 11, 2017.

Arvind Subramanian highlighted decline in farm revenues and non-cereal food prices, farm loan waivers, fiscal consolidation and declining profitability in the power and telecommunication sectors as the factors generating deflationary tendencies.

Additionally, the survey also stated that the reform agenda now includes implementing the Goods and Services Tax smoothly, privatising Air India and addressing the banking sector's bad loans problem.

Enlisting stressed farm revenues, farm loan waivers and a series of deflationary impulses as reasons for anxiety for the economy, part two of the Economic Survey for 2016-17 said that meeting the upper end of the 6.75-7.5 per cent GDP growth forecast for 2017-18 will be a challenge.

Cuurency in circulation declined significantly following the demonetisation of high-value notes.

As regards Outlook for Growth 2017-18, Survey (Volume I) had forecast a range for real GDP growth of 6.75 per cent to 7.5 per cent for FY 2018.

It further said a number of indicators - GDP, IIP, credit offtake, investment and capacity utilisation - point to a deceleration in real activity since first quarter of 2016-17 and a further deceleration since the third quarter. The average gross bank credit to industry contracted by 0.2 per cent during the last financial year.

The Survey also highlights the fact that there has been significant moderation in CPI headline inflation during the last three years and that the current inflation is running well below the 4 percent target, suggesting that inflation by March 2018 is likely to be below the RBI's medium term target of 4 per cent.

The Survey expressed concern about sluggish growth and increasing indebtedness in some sectors of the economy, which has impacted the asset quality of banks. For Outlook for Prices & Inflation 2017-18, the Survey notes the outlook for inflation in the near-term will be determined by a number of proximate factors, including the outlook for capital flows and exchange rate which in turn will be influenced by the outlook and policy in advanced economies, especially the USA; the recent nominal exchange rate appreciation; the monsoon; the introduction of the GST; the 7th Pay Commission awards; likely farm loan waivers; and the output gap. Retail inflation in June fell to its lowest level in more than five years to 1.54 per cent. There are considerable scope for monetary policy easing.

"Cyclical conditions, then, suggest that the policy rate should actually be below-not 50-100 basis points or so above-the neutral rate".

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