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Economic Survey 2016: A Mixed story of hope and dispair

The Economic Survey 2016-17 was tabled in Parliament on January 31. It was prepared by the finance ministry’s chief economic adviser Arvind Subramanian. The economic survey has presented a picture marked by both hope and despair. It has expressed some major concerns and suggested ways to overcome them. Among the measure concerns noted is slowdown in economic growth, employment growth, rising NPAs and dwindling fiscal situation. However, the economy still remains to be one of the fastest growing economies with price stability. Economic reforms are also underway and the government is sensitive towards the problems faced by the poor people.

India’s economic growth has been pegged at 6.5 per cent for the current fiscal, down from 7.6 per cent recorded in the last financial year, but is expected to rebound in the range of 6.75-7.5 per cent in 2017-18.  The Survey’s GDP growth figure for the current fiscal is lower than 7.1 per cent the Central Statistics Office had forecast earlier this month. Mr. Subramanian stressed that it wouldn’t be appropriate to compare the Survey’s forecast of “a quarter to half percentage point decline in growth” to projections made by other agencies, including the International Monetary Fund, which has scaled down its India growth estimate to 6.6%. After a temporary slowdown in GDP growth, the Survey expects the economy to return to normal, once the scrapped currency is replaced by March. In the long run, tax revenues and GDP growth would be bolstered on account of greater tax compliance and a reduction in real estate prices.

The Chief Economic Adviser termed the move to cancel the legal tender nature of high-value currency notes (demonetization) a “radical currency-cum-governance-cum-social engineering measure to permanently and punitively raise the cost of illicit and unaccounted transactions or kala dhan (black money).” Mr. Subramanian declined comment on the design and implementation of demonetisation, but did speak on the costs, and long term benefits of what was “an unusual and unique monetary experiment” aimed at a structural break. “It would be fair to say that short term costs include the hardships and inconvenience faced, particularly by those in the informal sector.”

Here are the highlights of the Economic Survey 2016-17 tabled in Parliament today:

Growth
  • GDP growth for next fiscal pegged at 6.75-7.5 per cent
  • Growth this fiscal to be 6.5 per cent
  • Farm sector to grow at 4.1 per cent this fiscal, up from 1.2 per cent last year
  • Growth rate of industrial sector to moderate to 5.2 per cent this fiscal, from 7.4 per cent last fiscal
  • Service sector is estimated to grow at 8.9 per cent in 2016/17
  • Demonetisation to affect growth rate by 0.25-0.5 per cent, but to have long-term benefits
  • Demonetisation may affect supplies of certain agricultural products like sugar, milk, potatoes and onions
Inflation
  • CPI inflation seen around 4.5 to 5 per cent in 2016-17
  • Low inflation has taken hold, confidence in price stability has improved
  • Expect RBI to meet 5 per cent inflation target by March 2017
  • Prospect of lower oil prices over medium term likely to dampen inflationary expectations
  • Growth to return to normal as new currency comes in circulation
  • 2016-17 expected to be challenging from fiscal point of view; time is right for a review of medium-term fiscal framework
  • Subramanian says there is scope for easing monetary policy
Fiscal Situation
  • Implementation of wage hike, muted tax receipts to put pressure on fiscal deficit in 2017/18
  • 2015-16 fiscal deficit, seen at 3.9 per cent of GDP, seems achievable
  • As per the Economic Survey, there has been an improvement in the financial position of the States over the last few years. The average revenue deficit has been eliminated, while the average fiscal deficit was curbed to less than 3% of GSDP. The average debt to GSDP ratio has also fallen.
  • Need for fiscal prudence for both centre and states for fiscal health of the economy
  • The survey highlighted the need for fiscal prudence both by the Centre as well as the States in order to maintain overall fiscal health of the economy.
  • Survey says incentivizing the states for outstanding fiscal performance
  • Economic Survey 2016-17 elaborates that as the fiscal challenges mount for the states because of the Pay Commission recommendations, and mounting payments from the UDAY bonds, there is a need to review how fiscal performance can be kept on track.
Tax Policy
  • Income Tax net could be widened gradually by encompassing all high income earners
  • Proposes widening tax net from 5.5 per cent of earning individuals to more than 20 per cent
  • Tax revenue expected to be higher than budgeted levels in 2015-16
  • Favours review and phasing out of tax exemptions; easiest way to widen the tax base not to raise exemption thresholds
  • Tax administration could be improved to reduce discretion and improve accountability
  • Prescribes cut in individual I-T rates, real estate stamp duties
  • Time table for cutting corporate tax should be accelerated
  • GST, other structural reforms should take the trend growth rate to 8-10 per cent
  • Fiscal windfall likely from Pradhan Mantri Garib Kalyan Yojana, low oil price
  • Fiscal gains from GST will take time to realise
  • Efforts to collect taxes on disclosed and undisclosed wealth should not lead to tax harassment
  • Chief Economic Adviser says expenditure planning needs to be embedded in medium-term fiscal framework
Government Debt
  • Government debt to GDP ratio in 2016 seen at 68.5 per cent down from 69.1 per cent in 2015
Current Account
  • 2016/17 current account deficit seen around 1-1.5 per cent of GDP
Currency
  • Rupee’s value must be fair, avoid strengthening; fair value can be achieved through monetary relaxation
  • India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment in China
  • India needs to prepare itself for a major currency readjustment in Asia in wake of a similar adjustment in China
  • gradual depreciation can be allowed if capital inflows are weak
  • Universal Basic Income Scheme is an alternative to plethora of state subsidies for poverty alleviation.
Demonetisation
  • Remonetisation will ensure that the cash squeeze is eliminated by April 2017
  • Supply of currency should follow actual demand and not be dictated by official estimate of desirable demand
  • Government windfall arising from unreturned notes should be deployed towards capital spending
Digitalisation
  • While sounding a warning note on Centre’s digital push, the economic survey advocates a balanced approach towards a digital future. It advises banks to ‘facilitate not thwart interoperability.’
Banking
  • To tackle with the problems of increasing Non-Performing Assets (NPAs) of the banking system and declining credit and investment, the Economic Survey 2016-17 on Tuesday recommended a centralised Public Sector Asset Rehabilitation Agency (PARA) to look at the “largest, most difficult cases, and make politically tough decisions to reduce debt.”
  • As per the Survey, gross NPAs have climbed to almost 12 per cent of gross advances for public sector banks at end-September 2016. At this level, India’s NPA ratio is higher than any other major emerging market, with the exception of Russia.
  • Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong
  • Chief Economic Adviser Calls for liquidity to be injected into the financial system
  • Estimated capital requirement for banks around 1.8 trillion rupees by 2018-19
  • Proposes to make 700 billion rupees available via budgetary allocations during current and succeeding years in banks
  • Government could sell off certain non-financial companies to infuse capital in state-run banks
  • Corporate, bank balance sheets remain stretched, affecting prospects for reviving private investments.
Unemployment and job creation
  • The performance in job creation has been dismal in the previous year. As job creation has emerged as a major challenge for the economy, the Economic Survey 2016-17 tabled in Parliament on Tuesday pointed out that the focus should be towards labour-intensive sectors such as apparel and leather.
  • The Survey pointed out that the rising labour cost in China is leading to a situation where the country is gradually vacating its dominant position in these sectors and India should look to capitalise on the opportunity through required change in policy.
  • It also called for easing labour regulations and negotiating free trade agreements (FTAs) with the European Union (EU) and the UK.
  • Based on recent in-house analysis in 2016, it is estimated that an FTA with the EU and the UK can lead to 1,08,029, 23,156, and 14,347 additional direct jobs per annum in the apparel, leather and footwear sectors respectively.
  • Stating that if rapid economic growth is one critical element of the policy response, enabling environment for investments and targeted action are also key requirements.
  • Though India has the comparative advantage in terms of cheaper and more abundant labour, the Survey pointed out that the two sectors face common challenges such as logistics, labour regulations, and tax & tariff policy, and disadvantages emanating from the international trading environment compared to competitor countries.

    Economic Survey-Unemployment Rate
    Unemployment Rate-2015-16
Universal basic income

UBI scheme seeks to provide a minimum income to citizens. While a pure UBI advocates the government guaranteeing a minimum income level for all citizens, irrespective of their income, India, if it were to go ahead with a scheme on these lines, is more likely to tweak the broader concept to target people facing abject poverty. In July last year, Chief Economic Adviser Arvind Subramanian argued that a basic income scheme can be tried in the most disadvantaged regions of the country, rather than making it universal to start with. Last week, speaking at World Economic Forum in Davos, Niti Aayog CEO Amitabh Kant said the government can try UBI in the form of interest free loan to poor people for a period of 3-4 years, which is repaid and recycled. He said UBI will be important in the context of disruption being caused in the job market through automation, and the government needs to do an in-depth analysis before launching such a scheme. In the Indian context, a universal basic income has to be examined in the context of the fact that you already have a rural employment guarantee scheme, which is being implemented but has huge leakages. There is public distribution system being implemented, but again is riddled with corruption.  It is better option to put money directly into the accounts of the poor, because it will spur rural demand. Hence, Universal Basic Income (UBI) proposal is a powerful idea, but not ready for implementation.

  • UBI an alternative to plethora of state subsidies for poverty alleviation
  • UBI would cost between 4 and 5 per cent of GDP
  • Among the developed countries, Switzerland had recently rejected a proposal in a referendum to provide UBI, while Finland announced a pilot project for such a scheme. India did a similar pilot in two villages of Madhya Pradesh in 2010.
Subsidies
  • The government would present a cost-benefit analysis on various subsidies being given to the poor, vis-a-vis giving them direct cash transfer in the form of UBI, the official said.
  • During 2016-17, the Centre has estimated its expenditure on subsidies at Rs 2.5 lakh crore. The largest chunk of Rs 1.34 lakh crore has been estimated as food subsidy for the year, while Rs 70,000 crore is the estimated subsidy for fertilisers. Petroleum products accounted for another Rs 26,947 crore, which include Rs 19,802.79 crore for subsidy on LPG and Rs 7,144.21 crore for kerosene subsidy.
  • The government also planned to provide Rs 15,000 crore as interest subvention subsidy for providing short term credit to farmers. These are the main subsidies currently provided by the government. Apart from these subsidies, the government allocated another Rs 38,500 crore for the flagship MGNREGS (Mahatma Gandhi National Employment Guarantee Scheme).
Real Estate

Survey says that reality prices may deep further as investing undeclared income in real estate became tough after November 8, 2016. It also speaks of bringing real estate within the ambit of GST.

India is on the path of progress notwithstanding the problems it is facing, because the policy makers are aware about the problems and have the will power to address them by a mix of intelligent, sensible and implementable policies.

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