Economic Survey Volume II key highlights: Economy relatively resilient to demonetisation

Key Highlights: 

• Inflation likely to be below RBI's 4% target
• Economy continues to be relatively resilient to liquidity shock of demonetisation
• Structural changes in oil markets good for the Indian economy

The second volume of Economic Survey 2016-17 which was tabled in the parliament on Friday said that it noticed a 'rekindled' optimism on structural reforms in Indian economy. It emphasised on the growing confidence that macro-economic stability has become entrenched because of government and RBI actions. 

The Economic Survey said, "Various factors such as 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."

The Survey, however, cautioned that farm loan waivers, non-cereal food inflation continue to reign anxiety on the Indian economy. It said that these concerns are weighing heavy on the economy and keeping it away from its potential.

It said, "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 said that the real economy growth, at 7.1%, was higher than what was predicted in the volume one of the Economic Survey of 2016-17. It said, "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 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 said, "With the green shoots slowly becoming visible in merchandise trade, and robust capital flows, the external position appears robust, reflected inter alia in rising reserves and a strengthening exchange rate."

On stressed assets, the Survey said that the ratio of stressed companies in the power sector (defined as the share of debt owed by companies with an interest coverage (IC) ratio of less than 1) has been steadily rising this year, reaching 70%, with an associated vulnerable debt of over Rs. 3.6 lakh crore.

"The telecommunications sector has experienced its own version of the “renewables shock” in the form of a new entrant that has dramatically reduced prices for, and increased access to, data, thereby benefitting—at least in the short run— consumers; after launching of services by the new entrant in September 2016, the average revenue per user (ARPU) for the industry on aggregate has come down by 22% vis-à- vis the long term (December 2009- June 2016) ARPU, and by about 32% since September 2016."