Fiscal consolidation might come under threat due to GST

RBI Annual Report FY 2016-17 – An Overview

Reserve Bank of India in its annual report stated that fiscal consolidation may come under threat both at the central and state level due to the immediate effects of the goods and service tax (GST), loan waivers and pay revisions, putting pressure on the overall growth matrix.

 

 

According to the report, public administration, defense, and other services mainly stifled the growth number. PADO added 2.2% points to the growth of real GVA in the services sector and 1.4 % points to the growth of overall GVA of 6.6% during the year.

In terms of production, agriculture and other allied activities recovered sharply in 2016-17. This was mainly facilitated by adequate monsoons as well as a considerable amount of increase in pulses’ minimum support prices (MSPs) that augmented the sector’s growth.

RBI said that there were uncertainties in regard to revenue mobilization, subsequent to the implementation of the goods and services tax along with increasing committed liabilities of states could led to a possible breach of fiscal deficit targets.

“In the fiscal sphere, while the gains in growth, efficiency and tax buoyancy over the medium term from the recent implementation of GST are unequivocally recognised, near-term uncertainties with regard to revenue mobilization therefrom – which could impact fiscal consolidation at both centre and state levels – cannot be ruled out as this fundamental reform gains pan-India traction,” RBI said in its annual report

The State finances have also deteriorated on account of the UDAY (Ujwal Discom Assurance Yojana) scheme aimed at reviving poor power distribution companies (discoms) and revenue falling short despite cutbacks in capital expenses. Additionally, four state governments – Uttar Pradesh, Maharashtra, Punjab, and Karnataka — are likely to face challenges as the farm loan waiver could derail the fiscal discipline.

 

Infrastructure saw many firsts

Stalled projects declined by 40% in terms of value and 37% in terms of number, according to the RBI’s annual report.
The financial year saw the highest ever awarding and construction of national highways. Also, capacity addition in all the major ports was also the highest during this year. India for the first time turned from a net importer to a net exporter of electricity.

 

Aggregate Demand Suffered

During the financial year 2016-17, GDP weakened due to the slowdown in Gross capital formation (Net increase in physical assets in the financial year) as a result of sluggish business confidence and lowering in the entrepreneurial spirit took a toll on the new investment.Gross fixed capital formation contributed barely 0.7 percentage points to the real GDP growth of 7.1% in FY17, despite accounting for around one-third of real GDP.
RBI’s assessment reflects the real GDP growth was largely sustained by private and public spending. In fact, in the absence of factors like the 7th Central Pay Commission hikes and the one-rank-one-pension for defense services, real GDP growth would have been lower by 2 percentage points, the regulator noted.

The RBI said Private consumption spending alone contributed two-thirds of the growth in aggregate demand.

On Demonetisation

The RBI reported that 632.6 crore notes of Rs 1,000 denomination in circulation, 8.9 crores have not been returned post the note ban on 8th November 2016. Thus, only 1.3% of Rs 1000 notes didn’t return after the demonetization exercise. The printing cost of new notes doubled to Rs 7,965 cr in the financial year 2017 from Rs 3,421 cr in the financial year 2016 on account of new currency printing post note ban.

Source – RBI Annual Report

http://www.moneycontrol.com/news/business/economy/only-1-3-of-rs-1000-notes-didnt-return-after-demonetisation-rbi-report-2373311.html

Economic Times- http://economictimes.indiatimes.com/news/economy/finance/fiscal-consolidation-may-be-derailed-due-to-gst-loan-waivers-and-pay-revisions/articleshow/60294821.cms

Image source- Financial Express

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