PressInformationBureau

GovernmentofIndia
MinistryofFinance
27February201512:27IST

EconomicSurvey201415Highlights
EconomicOutlook,ProspectsandPolicyChallenges
Macroeconomicfundamentalsin201415havedramaticallyimproved.Highlightsare:
Inflationhasdeclinedbyover6percentagepointssincelate2013.
Thecurrentaccountdeficithasdeclinedfromapeakof6.7percentofGDP(inQ3,201213)toanestimated
1.0percentinthecomingfiscalyear.
Foreignportfolioflowshavestabilizedtherupee,exertingdownwardpressureonlongterminterestrates,
reflectedinyieldson10yeargovernmentsecurities,andcontributedtothesurgeinequityprices.
Inresponsetothefavourabletermsoftradeshock(especiallywithregardtooil),macroeconomicpolicyhas
appropriatelybalancedgovernmentsavings(twothirds)andprivateconsumption(onethird).
Afteranearly12quarterphaseofdeceleration,realGDPhasbeengrowingat7.2percentonaveragesince
201314, based on the new growth estimates of the Central Statistics Office. Notwithstanding the new
estimates,thebalanceofevidencesuggeststhatIndiaisarecovering,butnotyetasurging,economy.

Fromacrosscountryperspective,aRationalInvestorRatingsIndex(RIRI)whichcombinesindicatorsofmacro
stabilitywithgrowth,illustratesthatIndiaranksamongstthemostattractiveinvestmentdestinations.Itrankswell
abovethemeanforitsinvestmentgradecategory(BBB),andalsoabovethemeanfortheinvestmentcategoryabove
it(onthebasisofthenewgrowthestimates).

Severalreformshavebeenundertakenandmoreareontheanvil.TheintroductionoftheGSTandexpandingdirect
benefittransferscanbegamechangers.

Structuralshiftsintheinflationaryprocessareunderwayduetoloweroilprices,decelerationinagricultureprices
andwages,anddramaticallyimprovedhouseholdinflationexpectations.Goingforwardinflationislikelytoremain
inthe55.5percentrange,creatingspaceforeasingofmonetaryconditions.

Intheshortrun,growthwillreceiveaboostfromthecumulativeimpactofreforms,loweroilprices,likelymonetary
policy easing facilitated by lower inflation and improved inflationary expectations, and forecasts of a normal
monsoon in 201516. Using the new estimate for 201415 as the base, GDP growth at constant market prices is
expectedtoacceleratetobetween8.1and8.5percentin201516.


MediumtermprospectswillbeconditionedbythebalancesheetsyndromewithIndiancharacteristicsthathasthe
potentialtoholdbackrapidincreasesinprivatesectorinvestment.Privateinvestmentmustbetheengineoflongrun
growth.However,thereisacaseforrevivingtargetedpublicinvestmentasanengineofgrowthintheshortrunto
complementandcrowdinprivateinvestment.

India can balance the shortterm imperative of boosting public investment to revitalize growth with the need to
maintain fiscal discipline. Expenditure control, and expenditure switchingfrom consumption to investment,will be
key.

Theoutlookisfavourableforthecurrentaccountdeficitanditsfinancing.Alikelysurfeit,ratherthanscarcity,of
foreigncapitalwillcomplicateexchangeratemanagement.Reconcilingthebenefitsoftheseflowswiththeirimpact
onexportsandthecurrentaccountremainsanimportantchallengegoingforward.

Indiafacesanexportchallenge,reflectedinthefactthattheshareofmanufacturingandservicesexportsinGDPhas
stagnatedinthelastfiveyears.Theexternaltradingenvironmentislessbenignintwoways:partnercountrygrowth
andtheirabsorptionofIndianexportshasslowed,andmegaregionaltradeagreementsbeingnegotiatedbythemajor
tradingnationsinAsiaandEuropethreatentoexcludeIndiaandplaceitsexportsatacompetitivedisadvantage.

Indiaisincreasinglyyoung,middleclass,andaspirationalbutremainsstubbornlymale.Severalindicatorssuggest
that gender inequality is persistent and high. In the short run, the renewed emphasis on family planning
targets,backedbymisalignedincentives,isunderminingthehealthandreproductiveautonomyofwomen.
FiscalFramework
Indiamustadheretothemediumtermfiscaldeficittargetof3percentofGDP.Thiswillprovidethefiscalspaceto
insureagainstfutureshocksandalsotomoveclosertothefiscalperformanceofitsemergingmarketpeers.

Indiamustalsoreversethetrajectoryofrecentyearsandmovetowardthegoldenruleofeliminatingrevenuedeficits
andensuringthat,overthecycle,borrowingisonlyforcapitalformation.

ExpenditurecontrolcombinedwithrecoveringgrowthandtheintroductionoftheGSTwillensurethatmediumterm
targetsarecomfortablymet.

In the short run, the need for accelerated fiscal consolidation is lessened by the dramatically changed macro
circumstancesandthelessthanoptimalnatureofprocyclicalpolicy.Theabilitytodosowillbeconditionedbythe
recommendationsoftheFourteenthFinanceCommission(FFC).

Nevertheless,toensurefiscalcredibilityandconsistencywithmediumtermgoals,theprocessofexpenditurecontrol
toreducethefiscaldeficitshouldbeinitiated.Atthesametime,thequalityofexpenditureneedstobeshiftedfrom
consumption,byreducingsubsidies,towardsinvestment.

Finally,implementingtheFFCrecommendationswillleadtostatesaccountingforalargeshareoftotaltaxrevenue.
Thishastheimportantimplicationthat,goingforward,Indiaspublicfinancesmustbeviewedattheconsolidated
levelandnotjustatthelevelofthecentralgovernment.Ifrecenttrendsinstatelevelfiscalmanagementcontinue,
thefiscalpositionattheconsolidatedlevelwillbeonasustainablepath.

SubsidiesandtheJAMNumberTrinitySolution
The debate is not about whether but how best to provide support to the poor and vulnerable. The government
subsidisesawidevarietyofgoodsandserviceswiththeaimofmakingthemaffordableforthepoor,including:rice,
wheat,pulses,sugar,railways,kerosene,LPG,naphtha,ironore,fertiliser,electricity,water.
ThedirectfiscalcostoftheseselectsubsidiesisroughlyRs.378,000croreor4.2percentof201112GDP.Thisis
roughlyhowmuchitwouldcosttoraisetheexpenditureofeveryhouseholdtothelevelofa35thpercentilehousehold
(wellabovethe21.9percentTendulkarCommitteepovertyline).
Arethesesubsidieseffectivelytargetedatthepoor?Unfortunately,subsidiescansometimesberegressiveandsuffer
fromleakages.Forexample,electricitysubsidiesbydefinitiononlyhelpelectrifiedhouseholds.Eveninthecaseof
kerosene,41percentofPDSkeroseneislostasleakageandonly46percentoftheremaining59percentisconsumed
byhouseholdsthatarepoor.
TheJAMNumberTrinityJanDhanYojana,Aadhaar,MobilecanenabletheStatetotransferfinancialresources
tothepoorinaprogressivemannerwithoutleakagesandwithminimaldistortingeffects.
TheInvestmentChallenge
The stock of stalled projects stands at about 7 percent of GDP, accounted for mostly by the private sector.
Manufacturingandinfrastructureaccountformostofthestalledprojects.Changedmarketconditionsandimpeded
regulatoryclearancesaretheprominentreasonsforstallinginprivateandpublicsectors,respectively.

Thishasweakenedthebalancesheetsofthecorporatesectorandpublicsectorbanks,whichinturnisconstraining
futureprivateinvestment,completingaviciouscircle.

 Despite high rates of stalling, and weak balance sheets, the stock market valuations of companies with stalled
projectsarequiterobust,whichisapuzzle.

CombiningthesituationofIndianpublicsectorbanksandcorporatebalancesheetssuggeststhattheexpectationthat
theprivatesectorwilldriveinvestmentneedstobemoderated.Inthislight,publicinvestmentmayneedtostepinto
rampupcapitalformationandrecreateanenvironmenttocrowdintheprivatesector.
TheBankingChallenge
The Indian banking balance sheet is suffering from double financial repression. On the liabilities side, high
inflation lowered real rates of return on deposits. On the assets side, statutory liquidity ratio (SLR) and priority
sector lending (PSL) requirements have depressed returns to bank assets. As inflation moderates and the banking
sectorexitsliabilitysiderepression,itisagoodtimetoconsideraddressingtheassetsidecounterpart.

In a crosscountry comparison, controlling for the level of development, the size of the Indian banking system,
measured by credit indicators, does not seem too high either in absolute terms or relative to other sources of
financing.However,goingforward,capitalmarketsandbondfinancingneedtobegivenaboost.

PrivatesectorbanksdidnotpartakeinthebiggestprivatesectorfuelledgrowthepisodeinIndianhistoryduring
20052012. This is reflected in the nearconstant share of private sector banks in deposits and advances in those
years.

Thereissubstantialvariationintheperformanceofthepublicsectorbanks,sothattheyshouldnotbeperceivedasa
homogenousblockwhileformulatingpolicy.

PuttingPublicInvestmentonTracktheRailRoutetoHigherGrowth.
TheIndianRailwaysovertheyearshavebeenonaroutetonowherecharacterizedbyunderinvestmentresultingin
lack of capacity addition and network congestion neglect of commercial objectives poor service provision and
consequentfinancialweakness.Thesehavecumulatedtobelowpotentialcontributiontoeconomicgrowth.

Verymodesthikesinpassengertariffsandcrosssubsidisationofpassengerservicesfromfreightoperationsoverthe
yearshavemeantthatIndian(PPPadjusted)freightratesremainamongthehighestintheworld,withtherailways
cedingsignificantshareinfreighttraffictoroads(thatistypicallymorecostlyandenergyinefficient).

Asaresult,thecompetitivenessofIndianindustryhasbeenundermined.CalculationsrevealthatChinacarriesabout
thriceasmuchcoalfreightperhourvisvisIndia.CoalistransportedinIndiaatmorethantwicethecostvisvis

China,andittakes1.3timeslongertodoso.

Econometricevidencesuggeststhattherailwayspublicinvestmentmultiplier(theeffectofaRs.1increaseinpublic
investmentintherailwaysonoveralloutput)isaround5.
However, in the long run, the railways must be commercially viable and public support must be linked to
railwayreforms:adoptionofcommercialpracticestariffrationalizationandtechnologyoverhaul.

SkillIndiatoComplementMakeinIndia
Whatshouldwe Make in India? Sectors that are capable of facilitating structural transformation in an emerging
economymust:
Haveahighlevelofproductivity.
Showconvergencetothetechnologicalfrontierovertime.
Drawinresourcesfromtherestoftheeconomytospreadthefruitsofgrowth.
Bealignedwiththeeconomyscomparativeadvantageand
Betradeable.

Registeredmanufacturing,constructionandseveralservicesectorsparticularlybusinessservicesperformwellon
thesevariouscharacteristics.Akeyconcernwiththesesectorshoweveristhattheyareratherskillintensiveanddo
notmatchtheskillprofileoftheIndianlabourforce.
IndiacouldbolstertheMakeinIndiainitiative,whichrequiresimprovinginfrastructureandreforminglaborandland
lawsbycomplementingitwiththeSkillingIndiainitiative.Thiswouldenablealargersectionofthepopulationto
benefitfromthestructuraltransformationthatsuchsectorswillfacilitate.
ANationalMarketforAgriculturalCommodities
Markets in agricultural products are regulated under the Agricultural Produce Market Committee (APMC) Act
enactedbyStateGovernments.Indiahasnotone,not29,butthousandsofagriculturalmarkets.
APMCslevymultiplefeesofsubstantialmagnitude,thatarenontransparent,andhenceasourceofpoliticalpower.
The Model APMC Act, 2003 could benefit from drawing upon the Karnataka Model that has successfully
introduced an integrated single licensing system. The key here is to remove the barriers that militate against the
creationofchoiceforfarmersandagainstthecreationofmarketinginfrastructurebytheprivatesector.
ClimateChange

Indiahascutsubsidiesandincreasedtaxesonfossilfuels(petrolanddieselalongwithacoalcess)turningacarbon
subsidyregimeintooneofcarbontaxation.TheimplicitcarbontaxisUS$140forpetrolandUS$64fordiesel.

Inlightoftherecentfallingglobalcoalpricesandthelargehealthcostsassociatedwithcoal,theremayberoomfor
further rationalization of coal pricing. The impact of any such changes on affordable energy for the poor must be
takenintoaccount.

On the whole, the move to substantial carbon taxation combined with Indias ambitious solar power program
suggeststhatIndiacanmakesubstantialcontributionstotheforthcomingParisnegotiationsonclimatechange.

TheFourteenthFinanceCommission
TheFFCmarksawatershedinthehistoryofIndianfederalism.Unprecedentedincreasesintaxdevolutionwill
confermorefiscalautonomyonthestates.ThiswillbeenhancedbytheFFCinducedimperativeofhavingtoreduce
thescaleofothercentraltransferstothestates.Inotherwords,stateswillnowhavegreaterautonomybothonthe
revenueandexpenditurefronts.

Allstatesstandtogainfromextraresourcesalthoughtherewillbesomevariationbetweenthestates.

FFCtransfersarehighlyprogressivethatis,stateswithlowerpercapitaNSDPreceiveonaveragemuchlarger
transferspercapita.Incontrast,plantransfersweremuchlessprogressive.

Theconcernthatmoretransferswillunderminefiscaldisciplineisnotwarrantedbecausestatesasawholehave
beenmoreprudentthanthecentreinrecentyears.

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DSM/SR