InsightsintoEditorial:EconomicSurvey201617

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

Money/interest Cashdeclinedsharply Cashwillrecoverbutsettleatalowerlevel

rates

Bankdepositsincreasedsharply Depositswilldecline,butprobablysettleata
slightlyhigherlevel

RBIsbalancesheetlargelyunchanged: RBIsbalancesheetwillshrink,afterthe
returnofcurrencyreducedthecentral deadlineforredeemingoutstandingnotes
bankscashliabilitiesbutincreasedits
depositliabilitiestocommercialbanks

Interestratesondeposits,loans,and Loanratescouldfallfurther,ifmuchofthe
governmentsecuritiesdeclinedimplicit depositincreaseprovesdurable
rateoncashincreased

FinancialSystem Increased Increase,totheextentthatthecashdeposit

Savings ratiofallspermanently

Corruption Coulddecline,ifincentivesforcompliance
(underlyingillicit improve
activities)

Unaccounted Stockofblackmoneyfell,assome Formalizationshouldreducetheflowof

income/black holderscameintothetaxnet unaccountedincome
money
(underlying
activitymayor
maynotbeillicit)

PrivateWealth Privatesectorwealthdeclined,since Wealthcouldfallfurther,ifrealestateprices

somehighdenominationnoteswerenot continuetodecline
returnedandrealestatepricesfell
 Noeffect. Government/RBIswealthwillincreasewhen
unreturnedcashisextinguished,reducing
PublicSector liabilities
Wealth

Formalization/ Digitaltransactionsamongstnewusers Somereturntocashassupplynormalises,but

(RuPay/AEPS)increasedsharply thenowlauncheddigitalrevolutionwill
digitilisation existinguserstransactionsincreasedin continue
linewithhistoricaltrend

Realestate Pricesdeclined,aswealthfellwhilecash Pricescouldfallfurtherasinvesting

shortagesimpededtransactions undeclaredincomeinrealestatebecomes
moredifficultbuttaxcomponentcouldrise,
especiallyifGSTimposedonrealestate

Broader Joblosses,declineinfarmincomes, Shouldgraduallystabilizeastheeconomyis

economy socialdisruption,especiallyincash remonetized
intensivesectors

GDP Growthslowed,asdemonetisation Couldbebeneficialinthelongrunif

reduceddemand(cash,privatewealth), formalizationincreasesandcorruptionfalls
supply(reducedliquidityandworking
capital,anddisruptedsupplychains),and
increaseduncertainty

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

Uncertainty/ Uncertaintyincreased,asfirmsand Credibilitywillbestrengthenedif

householdswereunsureoftheeconomic
Credibility impactandimplicationsforfuturepolicy
Investmentdecisionsanddurablegoods
purchasespostponed
demonetisationisaccompaniedby
complementarymeasures.Earlyandfull
remonetisationessential.Taxarbitrarinessand
harassmentcouldattenuatecredibility

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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