Rising downward risks to economy

The second volume of the Economic Survey prepared by Chief Economic Adviser Arvind Subramanian must be acclaimed for being candid about the challenges before the Indian economy, although it retains optimism. That is exactly the state the economy is in: not everything is rosy as the Union ministers and BJP spokespersons want us to believe, but there are bright spots that must be leveraged to revive growth, so essential for job creation. The Survey sounds caution about downward risks to the economy, visible from the data on the core Gross Value Addition (excluding agriculture and government) which mainly comprises industrial output, credit expansion, investment and the capacity utilisation of the production lines. “A number of indicators…point to a deceleration in real activity since the first quarter of 2016-17, and a further deceleration since the third quarter,” the key economic document that was presented to Parliament noted.

The first volume of the Survey, released six months ago, had a GDP forecast of between 6.75% and 7.5%. Its optimism was based on buoyant exports, post-demonetisation catch-up in consumption, and relaxation of monetary conditions. Those assumptions seem to be going wayward. ‘’Since then, all the new factors — real exchange rate appreciation, farm loan waivers, increasing stress to balance sheets in power, telecommunications, agricultural stress and the transitional challenges from implementing the GST — impart a deflationary bias to activity…the balance of risks seem to have shifted to the downside”. It reinforces the need for immediate resolution of the debt problems plaguing the economy. The Survey focuses on debt resolution and reduction. Quite a sensible reading of the situation it is.

There is yet another piece of advice for the government with regard to agriculture which is under stress, paradoxically from higher output and better rains. It talks about changing the narrative from inflation to better farm income, even if the consumers have to pay a little extra. “Given that 2017 will also be a year of surplus rather than scarcity, and to the extent that firming up prices will be essential to boost agricultural incomes, it is imperative to learn the lessons from the experience of 2016. One such lesson…is that farmers respond to prices. Lower prices one year affect sowing and prices in the next, which creates a cobweb cycle”. Remunerative prices for farmers and consumer interest can co-exist. It rightly makes out a case for stable minimum support prices for the harvest, which must be backed by adequate procurement by the central and state agencies. There is no need to restrict exports, either.