Inflation to stay below RBI's target of 4%: Economic Survey

Ivan Schwartz
August 11, 2017

"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 RBI recently cut repo rate by 25 basis points bringing interest rates down to 6%.

However the Survey cautions that anxiety reigns because a series of deflationary impulses are weighing on an economy, yet to gather its full momentum and still away from its potential.

It saw farm loan waivers by states touching Rs 2.7 lakh crore.

Signalling price stability, the Economic Survey-II on Friday said retail inflation at the end of March 2018 will remain within Reserve Bank of India's (RBI) medium term target of 4%.

Besides the major strategies, it also said cross-cutting trade policy issues and sector-specific issues like making power available at competitive rates, including lower rates for non-peak hours can be a game changer for textiles exports. There are considerable scope for monetary policy easing.

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Noting that during 2016-17, gross bank credit outstanding grew at around 7 per cent on an average, the Survey said, "The sluggish growth can be attributed to several factors, including incomplete transmission of the monetary policy as banks had not passed on the entire benefit of monetary easing to borrowers". The Chief Economic Adviser further added that the balance of risks to growth has shifted to the downside.

More dramatic have been developments during 2016-17- inflation declined sharply from 6.1 percent in July 2016 to 1.5 per cent in June 2017.

"New restrictions on visas and the risk of a backlash against the movement of persons, add to a situation that is of growing concern", it 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 report noted that there has been a "spurt in new tax payers and reported income after demonetisation".

The government and the RBI have taken "prominent steps" to address the twin balance sheet challenge which has boosted market confidence in the short run, it said. Also, the removal of checkposts and easing of transport constraints after Goods and Service Tax (GST) implementation can provide some short-term fillip to economic activity.

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