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insightsonindia.com/2017/02/01/insightseditorialeconomicsurvey201617/
INSIGHTS 2/2/2017
InsightsintoEditorial:EconomicSurvey201617
Whatiseconomicsurvey?
TheFinanceMinistryofIndiapresentstheEconomicSurveyintheparliamenteveryyear,justbeforetheUnion
Budget.Itistheministrysviewontheannualeconomicdevelopmentofthecountry.Aflagshipannualdocumentof
theMinistryofFinance,GovernmentofIndia,EconomicSurveyreviewsthedevelopmentsintheIndianeconomy
overtheprevious12months,summarizestheperformanceonmajordevelopmentprograms,andhighlightsthe
policyinitiativesofthegovernmentandtheprospectsoftheeconomyintheshorttomediumterm.Thisdocumentis
presentedtobothhousesofParliamentduringtheBudgetSession.
HighlightsoftheEconomicSurvey2011617:
TheIndianEconomyhassustainedamacroeconomicenvironmentofrelativelylowerinflation,fiscaldisciplineand
moderatecurrentaccountdeficitcoupledwithbroadlystablerupeedollarexchangerate.TheEconomicSurvey
201617statesthatsuchasustenanceisdespitecontinuingglobalsluggishness.
Itsays:
AspertheadvanceestimatesreleasedbytheCentralStatisticsOffice,thegrowthrateofGDPatconstant
marketpricesfortheyear201617isplacedat7.1%,asagainst7.6%in201516.Thisestimateisbased
mainlyoninformationforthefirstseventoeightmonthsofthefinancialyear.Governmentfinalconsumption
expenditureisthemajordriverofGDPgrowthinthecurrentyear.
Fixedinvestment(grossfixedcapitalformation)toGDPratio(atcurrentprices)isestimatedtobe26.6%in
201617,visvis29.3%in201516.
For201718,itisexpectedthatthegrowthwouldreturntonormalasthenewcurrencynotesinrequired
quantitiescomebackintocirculationandasfollowupactionstodemonetisationaretaken.Onbalance,there
isalikelihoodthatIndianeconomymayrecoverbackto6%to7%in201718.
Keyfacts:
Indirecttaxesgrewby26.9%duringAprilNovember2016.
TheheadlineinflationasmeasuredbyConsumerPriceIndex(CPI)remainedundercontrolforthethird
successivefinancialyear.TheaverageCPIinflationdeclinedto4.9%in201516from5.9%in201415and
stoodat4.8%duringAprilDecember2015.
InflationbasedonWholesalePriceIndex(WPI)declinedto()2.5%centin201516from2.0%in201415
andaveraged2.9%duringAprilDecember2016.Inflationisrepeatedlybeingdrivenbynarrowgroupoffood
items,ofthesepulsescontinuedtobethemajorcontributoroffoodinflation.
TradedeficitdeclinedtoUS$76.5billionin201617(AprilDecember)ascomparedtoUS$100.1billionin
thecorrespondingperiodofthepreviousyear.
Thecurrentaccountdeficit(CAD)narrowedinthefirsthalf(H1)of201617to0.3%ofGDPfrom1.5%inH1
of201516and1.1%in201516fullyear.
AtendSeptember2016,IndiasexternaldebtstockstoodatUS$484.3billion,recordingadeclineofUS$0.8
billionoverthelevelatendMarch2016.Indiaskeydebtindicatorscomparewellwithotherindebted
developingcountriesandIndiacontinuestobeamongthelessvulnerablecountries.
Agriculturesectorisestimatedtogrowat4.1%in201617asopposedto1.2%in201516thehighergrowth
inagriculturesectorisnotsurprisingasthemonsoonrainsweremuchbetterinthecurrentyearthanthe
previoustwoyears.
Growthrateoftheindustrialsectorisestimatedtomoderateto5.2%in201617from7.4%in201516.
DuringAprilNovember201617,amodestgrowthof0.4%hasbeenobservedintheIndexofIndustrial
Production(IIP).
Theeightcoreinfrastructuresupportiveindustries,viz.coal,crudeoil,naturalgas,refineryproducts,
fertilizers,steel,cementandelectricityregisteredacumulativegrowthof4.9%centduringAprilNovember
201617ascomparedto2.5%duringAprilNovember201516.
EconomicSurveyonGSTanddemonetisation:
TheEconomicSurveystatesthatagainstthebackdropofrobustmacroeconomicstability,theyearwasmarkedby
twomajordomesticpolicydevelopmentsthepassageoftheConstitutionalAmendment,pavingthewayfor
implementingthetransformationalGoodsandServicesTax(GST),andtheactiontodemonetizethetwohighest
denominationnotes.
Itsays,theGSTwillcreateacommonIndianmarket,improvetaxcomplianceandgovernance,andboost
investmentandgrowthitisalsoaboldnewexperimentinthegovernanceofIndiascooperativefederalism.
TheSurveyReportsaysthatdemonetisationhashadshorttermcostsbutholdsthepotentialforlongterm
benefits.Followupactionstominimizethecostsandmaximizethebenefitsinclude:fast,demanddriven,
remonetisationfurthertaxreforms,includingbringinglandandrealestateintotheGST,reducingtaxrates
andstampdutiesandactingtoallayanxietiesaboutoverzealoustaxadministration.
Theseactionswouldallowgrowthtoreturntotrendin201718,possiblymakingitthefastestgrowingmajor
economyintheworld,followingatemporarydipin201617.
TheSurveysuggestsafewmeasurestomaximizelongtermbenefitsandminimizeshorttermcostsof
demonetisation.One,fastremonetisationandespecially,freeconvertibilityofcashtodepositsincluding
throughearlyeliminationofwithdrawallimits.ThiswouldreducetheGDPgrowthdecelerationandcash
hoarding.Two,continuedimpetustodigitalizationwhileensuringthatthistransitionisgradual,inclusive,
basedonincentivesratherthancontrolsandappropriatelybalancingthecostsandbenefitsofcashversus
digitalization.Three,followingupdemonetisationbybringinglandandrealestateintotheGST.Four,
reducingtaxratesandstampduties.Andfinally,animprovedtaxsystemcouldpromotegreaterincome
declarationanddispelfearsofoverzealoustaxadministration.
ImpactofDemonetisation
Sector Impact
EffectthroughendDecember Likelylongertermeffect
Bankdepositsincreasedsharply Depositswilldecline,butprobablysettleata
slightlyhigherlevel
RBIsbalancesheetlargelyunchanged: RBIsbalancesheetwillshrink,afterthe
returnofcurrencyreducedthecentral deadlineforredeemingoutstandingnotes
bankscashliabilitiesbutincreasedits
depositliabilitiestocommercialbanks
Interestratesondeposits,loans,and Loanratescouldfallfurther,ifmuchofthe
governmentsecuritiesdeclinedimplicit depositincreaseprovesdurable
rateoncashincreased
Corruption Coulddecline,ifincentivesforcompliance
(underlyingillicit improve
activities)
Cashintensivesectors(agriculture,real Informaloutputcoulddeclinebutrecorded
estate,jewellery)wereaffectedmore. GDPwouldincreaseastheeconomybecomes
moreformalized
RecordedGDPwillunderstateimpacton
informalsectorbecauseinformal
manufacturingisestimatedusingformal
sectorindicators(IndexofIndustrial
Production).
Butovertimeastheeconomybecomes
moreformalizedtheunderestimationwill
decline.
RecordedGDPwillalsobeoverstated
becausebankingsectorvalueaddedis
based(interalia)ondepositswhichhave
surgedtemporarily
Taxcollection Incometaxesrosebecauseofincreased Indirectandcorporatetaxescoulddecline,to
disclosure theextentgrowthslows
Paymentstolocalbodiesanddiscoms Overlongrun,taxesshouldincreaseas
increasedbecausedemonetisednotes formalizationexpandsandcompliance
remainedlegaltenderfortax improves
payments/clearancesofarrears
Fiscalperformanceofstates:
TheEconomicSurveyhashighlightedtheneedforfiscalprudencebothbytheCentreaswellastheStatesinorder
tomaintainoverallfiscalhealthoftheeconomy.
TheEconomicSurveystatesthattheCentresFiscalResponsibilityandBudgetManagement(FRBM)Act,
wasmirroredbyFiscalResponsibilityLegislations(FRL)adoptedintheStates.
AspertheEconomicSurvey,therehasbeenanimprovementinthefinancialpositionoftheStatesoverthe
lastfewyears.Theaveragerevenuedeficithasbeeneliminated,whiletheaveragefiscaldeficitwascurbed
tolessthan3%ofGSDP.TheaveragedebttoGSDPratiohasalsofallen.
EconomicSurveyelaboratesthatasthefiscalchallengesmountforthestatesbecauseofthePay
Commissionrecommendations,andmountingpaymentsfromtheUDAYbonds,thereisaneedtoreviewhow
fiscalperformancecanbekeptontrack.
Greaterreliancewillneedtobeplacedonincentivizinggoodfiscalperformance,notleastbecausestatesare
graduallyrepayingtheirobligationstotheCentre,removingitsabilitytoimposeahardbudgetconstrainton
themsaystheEconomicSurvey.
Aboveall,however,incentivizinggoodperformancebytheStateswillrequiretheCentretobeanexemplarof
soundfiscalmanagementitself.
Labourmigration:
NewestimatesoflabourmigrationinIndiahaverevealedthatinterstatelabourmobilityissignificantlyhigherthan
previousestimates.Thestudybasedontheanalysesofnewdatasourcesandnewmethodologiesalsoshowsthat
themigrationisacceleratingandwasparticularlypronouncedforfemales.
Thedatasourcesusedforthestudyarethe2011CensusandrailwaypassengertrafficflowsoftheMinistry
ofRailwaysandnewmethodologiesincludingtheCohortbasedMigrationMetric(CMM).
ThenewCohortbasedMigrationMetric(CMM)showsthatinterstatelabourmobilityaveraged56.5million
peoplebetween2001and2011,yieldinganinterstatemigrantpopulationofabout60millionandaninter
districtmigrationashighas80million.
Thefirsteverestimatesofinternalworkrelatedmigrationusingrailwaysdatafortheperiod20112016
indicateanannualaverageflowofcloseto9millionmigrantpeoplebetweenthestates.
Boththeseestimatesaresignificantlygreaterthantheannualaverageflowofabout4millionsuggestedby
successiveCensusesandhigherthanpreviouslyestimatedbyanystudy.
Migrationforworkandeducationisalsoaccelerating.Intheperiod20012011therateofgrowthoflabour
migrantsnearlydoubledrelativetothepreviousdecade,risingto4.5%centperannum.Interestingly,the
accelerationofmigrationwasparticularlypronouncedforfemalesandincreasedatnearlytwicetherateof
malemigrationinthe2000s.
Thereisalsoadoublingofthestockofinterstateoutmigrantstonearly12millioninthe2029yearold
cohortalone.Oneplausiblehypothesisforthisaccelerationinmigrationisthattherewards(intheformof
prospectiveincomeandemploymentopportunities)havebecomegreaterthanthecostsandrisksthat
migrationentails.Highergrowthandamultitudeofeconomicopportunitiescouldthereforehavebeenthe
catalystforsuchanaccelerationofmigration.
Whilepoliticalbordersimpedetheflowofpeople,languagedoesnotseemtobeademonstrablebarrierto
theflowofpeople.Forexample,agravitymodelindicatesthatpoliticalbordersdepresstheflowsofpeople,
reflectedinthefactthatmigrantpeopleflowswithinstatesare4timesthanmigrantpeopleflowsacross
states.However,notsharingHindiasacommonlanguageappearsnottocreatecomparablefrictionstothe
movementofgoodsandpeopleacrossstates.
Thepatternsofflowsofmigrantsfoundinthisstudyarebroadlyconsistentwithwhatisexpectedless
affluentstatesseemoreoutmigrationmigratingoutwhilethemostaffluentstatesarethelargestrecipientsof
migrants.Sevenstateshavehighernetinmigration:Goa,Delhi,Maharashtra,Gujarat,TamilNadu,Kerala
andKarnataka.
Also,thecostsofmovingformigrantsareabouttwiceasmuchastheyareforgoodsanotherconfirmation
ofpopularconception.
RedistributiveResourceTransfers(RRT):
ThesurveyalsocalculatedRedistributiveResourceTransfers(RRT)fromtheCentre(between1994and2015)and
valueofnaturalresourcesforIndianStates(over1980and2014)andcorrelatedthesewithseveraleconomic
outcomesandanindexofgovernance.
RedistributiveResourceTransferorRRTtoastate(fromtheCentre)isdefinedasgrossdevolutiontothe
stateadjustedfortherespectivestatesshareinaggregateGrossDomesticProduct(GDP).Thetop10
recipientsare:Sikkim,ArunachalPradesh,Mizoram,Nagaland,Manipur,Meghalaya,Tripura,Jammuand
Kashmir,HimachalPradeshandAssam.
AnnualpercapitaRRTflowsforallnortheasternstates(exceptAssam)andJammu&Kashmirhave
exceededtheannualpercapitaconsumptionexpenditurethatdefinestheallIndiapovertylines,especially
theruralline.
Thesurveypointsoutthatthereisnoevidenceofapositiverelationshipbetweenthesetransfersandvarious
economicoutcomes,includingpercapitaconsumption,GSDPgrowth,developmentofmanufacturing,own
taxrevenueeffort,andinstitutionalquality.Instead,thereisasuggestiveevidenceofanegativerelationship.
Forexample,largerRRTflowsseemtonegativelyaffectfiscaleffort(definedastheshareofowntaxrevenue
toGSDP).ThesetrendsarerobusttoalternativedefinitionsofRRT.
Also,whethermineralrichstateslikeJharkhand,Chhattisgarh,Odisha,RajasthanandGujarat,aredoingwell
onthemetricsofeconomicoutcomesandgovernanceisconsideredinthecontextofredistributivetransfers.
However,thisdoesnotrevealconclusiveresultsandthereisnoevidenceofanegativerelationshipbetween
fiscaleffortandrelianceonrevenuefromnaturalresourcesovertheperiod200114.
Thus,theexistenceofaRRTcurseandthelackthereofofanaturalresourcecurseinthecontextofIndian
StatesimpliesthatboththeCentreandStatesneedtoacttomitigatetheeffectsoftheformerandguard
againsttheemergence,infuture,ofthelatter.Inthiscontext,thequestioniswhetherRRT,infuture,canbe
linkedmoresalientlytofiscalandgovernanceeffortsonthepartoftheStates.
TheEconomicSurvey20162017,alsosuggestsprovidingapartoftheRRTsortoredistributethegainsfrom
resourceuseasaUniversalBasicIncome(UBI)directlytohouseholdsinrelevantstateswhichreceivelarge
RRTflowsandaremorereliantonnaturalresourcerevenues.
Finally,recognizingandrespondingcreativelytopossiblepathologiescreatedbylargebountieseitherinthe
formofredistributiveresourcesornaturalresources,willbeimportanttoavoidmakingtheerrorsofhistory.
PublicSectorAssetRehabilitionAgency:
TheSurveyshowsthatourcountryhasbeentryingtosolveitsTwinBalanceSheet(TBS)problemoverleveraged
companiesandbadloanencumberedbanks,alegacyoftheboomyearsaroundtheGlobalFinancialCrisis.Sofar,
therehasbeenlimitedsuccess.Theproblemhasconsequentlycontinuedtofester:NonPerformingAssets(NPAs)
ofthebankingsystem(andespeciallypublicsectorbanks)keepincreasing,whilecreditandinvestmentkeepfalling.
Itsays,nowitistimetoconsideradifferentapproachacentralisedPublicSectorAssetRehabilitation
Agency(PARA)thatcouldtakechargeofthelargest,mostdifficultcases,andmakepoliticallytoughdecisions
toreducedebt.
TheSurveyreachestotheconclusionthataPARAmaybenecessarybecause:
Publicdiscussionofthebadloanproblemhasfocusedonbankcapital.Butfarmoreproblematicisfindinga
waytoresolvethebaddebtsinthefirstplace.
Somedebtrepaymentproblemshavebeencausedbydiversionoffunds.Butthevastmajorityhasbeen
causedbyunexpectedchangesintheeconomicenvironmentaftertheGlobalFinancialCrisis,whichcaused
timetables,exchangerates,andgrowthrateassumptionstogoseriouslywrong.
Thisconcentrationcreatesachallengesincelargecasesaredifficulttoresolve,butalsoanopportunitysince
TBScouldbeovercomebysolvingarelativelysmallnumberofcases.
Restoringthemtofinancialhealthwillrequirelargewritedowns.
Amongotherissues,theyfaceseverecoordinationproblems,sincelargedebtorshavemanycreditors,with
differentinterests.Andtheyfindithardfinanciallyandpoliticallytograntthemsizeabledebtreductions,or
totakethemoverandsellthem.
Itincreasesthecoststothegovernmentsincebaddebtsofthestatebankskeeprising,andincreasesthe
coststotheeconomy,byhinderingcredit,investment,andthereforegrowth.
Since,privaterunAssetReconstructionCompanies(ARCs)havenotbeensuccessfuleitherinresolvingbad
debts,thoughinternationalexperience(especiallythatofEastAsianeconomies)showsthataprofessionally
runcentralagencywiththegovernmentbackingcouldovercomethecoordinationandpoliticalissuesthat
haveimpededprogressoverthepasteightyears.
UniversalBasicIncome(UBI)SchemeanalternativetoplethoraofStatesubsidiesforpovertyalleviation:
TheEconomicSurveyhasadvocatedtheconceptofUniversalBasicIncome(UBI)asanalternativetothevarious
socialwelfareschemesinanefforttoreducepoverty.ThesurveyjuxtaposesthebenefitsandcostsoftheUBI
schemeinthecontextofthephilosophyoftheFatheroftheNation,MahatmaGandhi.TheSurveystatesthatthe
Mahatmaasastutepoliticalobserver,wouldhaveanxietiesaboutUBIasbeingjustanotheraddonGovernment
programme,butonbalance,hemayhavegiventhegoaheadtotheUBI.
TheSurveysaystheUBI,basedontheprinciplesofuniversality,unconditionalityandagency,isa
conceptuallyappealingideabutwithanumberofimplementationchallengeslyingaheadespeciallytherisk
thatitwouldbecomeanaddonto,ratherthanareplacementof,currentantipovertyandsocial
programmes,whichwouldmakeitfiscallyunaffordable.
BasedonasurveyonmisallocationofresourcesforthesixlargestCentralSectorandCentrallySponsored
SubSchemes(exceptPDSandfertilizersubsidy)acrossdistricts,theEconomicSurveypointsoutthatthe
districtswheretheneedsaregreatestarepreciselytheoneswhereStatecapacityistheweakest.This
suggeststhatamoreefficientwaytohelpthepoorwouldbetoprovidethemresourcesdirectly,througha
UBI.
ExploringtheprinciplesandprerequisitesforsuccessfulimplementationofUBI,theSurveypointsoutthatthe
twoprerequisitesforasuccessfulUBIare:(a)functionalJAM(JanDhan,AadharandMobile)systemasit
ensuresthatthecashtransfergoesdirectlyintotheaccountofabeneficiaryand(b)CentreState
negotiationsoncostsharingfortheprogramme.
TheSurveysaysthataUBIthatreducespovertyto0.5%wouldcostbetween45%ofGDP,assumingthat
thoseinthetop25%incomebracketdonotparticipate.Ontheotherhand,theexistingmiddleclass
subsidiesandfood,petroleumandfertilizersubsidiescostabout3%ofGDP.
TheSurveyconcludesthattheUBIisapowerfulideawhosetimeevenifnotripeforimplementation,isripe
forseriousdiscussion.
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