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Indian economy seen growing 6.75-7.5% in 2017-18

Government expects swift recovery from demonetization impact

NEW DELHI -- India's economy is expected to grow 6.75%-7.5% in the fiscal year beginning April, the Finance Ministry said in its pre-budget Economic Survey released Tuesday, indicating that it sees a swift recovery from the impact of the sudden ban on high-value banknotes in November.

The survey, which is tabled in parliament every year before the budget, reviews developments in Asia's third largest economy in the past 12 months. Breaking with tradition, India is presenting the national budget on the first day of February instead of the last. The railway budget -- which had been announced a few days before the main budget since 1924 -- is also being  merged with the national budget.

Prime Minister Narendra Modi's government scrapped 500- ($7.37) and 1,000-rupee notes suddenly on Nov. 8, a move to curb untaxed wealth, corruption, and counterfeit currency. The drastic step withdrew some 15.4 trillion rupees, or 86% of cash in circulation, from the economy. Although effective, it was highly disruptive because cash transactions accounted for about two-thirds of India's gross domestic product.

As a result, GDP growth for the current fiscal year ending March is expected to be lower than 7%. "The cash squeeze ... will have significant implications for GDP, reducing 2016-17 growth by a quarter to half a percentage point compared with the baseline of 7%," the survey said.

Advance estimates released by the Central Statistics Office earlier this month had placed the growth rate at 7.1%, against 7.6% in the year ended March 2016. "This [CSO] estimate is based mainly on information for the first seven to eight months of the financial year," the survey noted.

India's Finance Minister Arun Jaitley will present the annual budget on Feb. 1. (Photo by Press Information Bureau)

The government said the impact of demonetization on GDP growth was short-lived. "Once the cash supply is replenished, which is likely to be achieved by the end [0f] March 2017, the economy would revert to normal," according to the survey, which was presented to parliament by Finance Minister Arun Jaitley.

The survey pointed out both short-term costs and long-term benefits of demonetization. The costs include cash supply contraction and subsequent "temporary" slowdown in GDP growth; while it lists benefits such as increased digitization of the economy, greater tax compliance and a fall in property prices which used to be boosted by untaxed wealth.

The government has also been gradually pumping in replacement currency. The survey said remonetization would ensure that the cash squeeze is eliminated by the time the next fiscal year starts in April and growth is seen returning to normal levels for the next 12 months. "There is a likelihood that the Indian economy may recover back to 6.75% to 7.5% in 2017-18."

The survey noted 2016 was marked too by the passage of a key constitutional amendment in parliament that paved the way for implementing a goods and services tax (GST) in the next fiscal year.

It said the GST would create a common Indian market, improve tax compliance and governance, and boost investment and growth. "It is also a bold new experiment in the governance of India's cooperative federalism."

Sector-wise growth

The agriculture sector is estimated to grow 4.1% in the current fiscal year, up from just 1.2% in the previous one. The industrial sector is projected to grow 5.2%, compared with 7.4% in the year ended March 2016.

The eight core infrastructure-supportive industries -- coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity -- registered a cumulative growth of 4.9% in April-November, compared with 2.5% in the same period the previous year.

India's services sector is expected to grow 8.9% in the year ending March, almost the same as last year. It is the "significant pick-up" in public administration, defense and other services, boosted by enhanced salaries to millions of government employees that is estimated to push up the growth in services, the survey said.

On the trade front, exports grew 0.7% to $198.8 billion in April-December, while imports declined 7.4% to $275.4 billion. The trade deficit dropped to $76.5 billion in the first three quarters of the current financial year, from $100.1 billion in the corresponding period the previous year.

The survey also pointed out challenges that might impede India's progress. Among them is the authorities' "weak" capacity to deliver essential services such as health and education, it said, citing "high levels of corruption" and bureaucratic red tape.

"At the level of the states, competitive populism is more in evidence than competitive service delivery," it said. "Constraints to policymaking due to strict adherence to rules and abundant caution in bureaucratic decision-making favors [the] status quo."

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