Economic Survey takeaways: What it really says about note ban impact, Union Budget 2017

The Economic Survey is always viewed as being a wholesome document which contains everything that there should be in a report which tells us in detail all that has happened in the year so far as well as the prospects for the coming year. It also provides a very comprehensive outline of the possible policy actions that may be considered by the government in these areas. The survey for 2016-17 does very well on these counts.

The major issue of interest was the government’s take on demonetisation and its impact. Here the survey is candid in pointing out that there will be a slowdown in growth this year too which will be between 25 to 50 bps lower than their baseline projection of 7 percent. Hence, the earlier estimate of 7.1 percent put out by the CSO for FY17 would have to be scaled down accordingly as it had not taken into account the demonetisation impact. The stance here is that the demonetisation impact would be for a limited period and there would be greater gains for the country in the long run, though the exact extent has not been stated given that economies are susceptible to various forces.

The statement also talks of how both the demand and supply sides have been affected by the removal of old currency. Demand for goods has come down due to cash not being available while business which uses currency as raw materials had challenges. But on the positive side it has been stated that real estate prices are down and would move further towards the true rates in future. While auto production was down, the survey points out that the slowdown was witnessed even before this act and hence the two cannot be related.

However, interestingly, the Survey talks of growth next year being between 6.75-7.5 percent. There are two thoughts here. The first is that the range is too broad to be indicative as one side looks too low and the other high in relative terms and it is not possible to gauge where the final number will fit. Second, the fact that the government is talking of this range means that it does effectively expect the demonetisation effect to last for another year and this upper range of 7.5 percent would still be very marginally lower than the 7.6 percent number for FY16. The lower range is indicative of the downside risk which can be considerable to disrupt the momentum. Implicit is that we will have to wait until FY19 to think of those high rates of 8-9 percent growth.

There are three risks which are underlined here. The first is that the demonetisation effect will affect business in particular till normalcy is restored which will tend to put pressure on the supply side. Households too will have to adjust to the new dispensation which will work negatively for spending and hence growth.

Second is higher commodity prices especially oil and metals. While metals will keep inflation rates high, oil would raise challenges for both inflation as well as government budgeting. In the last year, the government has raised excise duty rates to ensure that collections were untouched when prices came down. Now with prices moving up allowing a full transmission will lead to higher inflation. Absorbing some of this cost will add to the subsidy level.

The third risk is the impasse on foreign trade at the global level. This would not be very serious for us and will have an impact only at the margin. But it does indicate that any exports thrust will be hard in this world as countries will strive to protect their turf. In the same breadth it talks of keeping our trade competitive, which can be an indication to the RBI to let the rupee weaken. The rupee has been a better performing currency and in an environment where all countries try to let their currencies fall, keeping pace is challenging.

What can be the takeaways when conjecturing the budget to be announced tomorrow? First, the tax collections to be budgeted for cannot be very different from last time in the ordinary course as the taxable base is not going to be increase significantly. With GST setting the contours of indirect taxes, there will not be much scope for changes in rates. On the other hand, the government may have to lower direct taxes for corporates and individuals as this has been assured during the demonetisation drive that too much black money was the reason behind maintaining higher rates.

Second, the survey has spoken of demonetisation resulting in fiscal gains from the money that escaped the system as well as the income disclosures. The former is interesting as the RBI had stated that there would be no such transfers to the government. The latter will be the number to look out for as it will provide an idea of the fiscal space that is available. As there has been talk of inclusive growth some compensation for the poor may be expected though it is more likely to be the existing subsidies being delivered through the Jan Dhan Aadhar Mobile mode (JAM).

The Survey cannot be linked directly with the budget content since it is only supposed to be the background material that is used by the FM, while the recommendations reflect stance if the government the implementation would be done in phased manner depending on the circumstances. But for sure, there are indications on the GDP growth for next year, which will be the nucleus of the entire exercise to be revealed tomorrow.