It said number of indicators like GDP and IIP point to a deceleration in real activity since first quarter of 2016-17
New Delhi : The Economic Survey Friday warned against farm loan waivers saying if all states start offering them, the total burden could swell to Rs 2.7 lakh crore and cause deflationary shock to an economy yet to gain full momentum. Farm loan waiver has been presumed to be inflationary. But the short-term consequences are likely to be “quite deflationary”, it said. So far, Uttar Pradesh, Karnataka, Maharashtra, Punjab, and Tamil Nadu have announced farm loan waivers. But the Supreme Court has stayed the decision of the Madras High Court to provide loan waivers to all farmers instead of only to small and marginal ones.
“There is possibility of a contagious spread (of farm loan waiver) to other states,” according to the mid-year 2016 -17 Economic Survey released for the first time. If other states will follow the UP model, an upper bound of loan waivers at the all-India level would be between Rs 2.2 and Rs 2.7 lakh crore, it said, adding that demands for farm loan waivers have emerged at a time when state finances have been deteriorating.
Assuming that the Centre will not take responsibility for the waivers and if states finance on their own, then aggregate demand would be affected.
“Loan waivers could reduce aggregate demand by as much as 0.7 per cent of GDP, imparting a significant deflationary shock to an economy yet to gain full momentum,” the Survey said.
The aggregate demand could be affected as a result of reduction in private consumption and higher borrowings by states, among others. “However, the actual impact will depend on the number of states that actually decide to grant waivers, and how they distribute them over time,” it added.
RBI’s key policy rate can come down by 25-75 bps
With inflation ruling low, there is scope for reducing RBI’s key policy rate by 25-75 basis points, said the Economic Survey-part II. The Survey further said broadly real neutral interest rates hover around 1.25-1.75 per cent, adding “that implies neutral nominal rates — assuming a target inflation of 4 per cent — of 5.25-5.75 per cent”.
Inflation to stay below RBI’s target of 4%
Signalling price stability, the Economic Survey-II said retail inflation at the end of March 2018 will remain within RBI’s medium-term target of 4 per cent. The Survey said the fact that current inflation is running well below the 4 per cent target suggests that inflation by March 2018 is likely to come in below the RBI’s medium-term goal of 4 per cent. It dubbed the current low level of inflation “a historic moment”, instilling confidence in price stability.
- Structural reform agenda includes implementing GST, Air India privatisation, rationalising energy subsidies, addressing twin balance sheet challenge facing banks
- Farm loan waiver could cut economy demand by up to 0.7% of GDP
- Current account deficit (CAD) down to 0.7% of GDP in 2016- 17 from 1.1% in 2015-16
- India’s forex reserves of USD 386.4 billion second largest after Brazil among major economies