Sunday - August 20th, 2017

Economic Survey warns of dangers of sustained deflation

The oil market is very different today than it was a few years ago, which means that the risk of oil prices rising beyond a point has been contained, Volume 2 of the Economic Survey 2016-17, tabled in Parliament on Friday, said.

However, the new volume also cautioned about the dangers of a sustained deflationary trend on farm revenue and the twin balance sheet problem of stressed corporate and bank financials.

“Examining if India is undergoing a structural shift in the inflationary process toward low inflation, the Survey notes that the oil market is very different today than a few years ago in a way that imparts a downward bias to oil prices, or at least has capped the upside risks to oil prices,” the government said in a release shortly following the tabling of Volume 2 in the Lok Sabha.

“Also, farm loan waivers could reduce aggregate demand by as much as 0.7% of GDP, imparting a significant deflationary shock to an economy,” the Survey noted.

The document said that, with inflation currently at well below the 4% target, by March 2018 it is likely to be below the RBI’s medium-term target of 4%.

According to the review of economic developments in Volume 2, the real economy grew by 7.1% in 2016-17 compared with 8% the previous year, a better performance than the range predicted in Volume 1 of the Survey released in February.

“This growth suggested that the economy was relatively resilient to the large liquidity shock of demonetisation which reduced cash in circulation by 22.6% in the second half of 2016-17,” the Survey said. “The apparent resilience was even more marked in nominal growth magnitudes because both nominal GVA and GDP growth accelerated by over 1 percentage point in 2016-17 compared with 2015-16.”

“The Survey notices a rekindled optimism on structural reforms in Indian economy,” it added. “Various factors such as the launch of the GST, positive impacts of demonetisation, decision in principle to privatise Air India, further rationalisation of energy subsidies and actions to address the Twin Balance Sheet (TBS) challenge contribute to this optimism.”

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