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In the Economic Survey for 2017-18, which was tabled in Parliament on Monday, Chief Economic Advisor Arvind Subramanian struck an optimistic note about economic growth going forward. The Survey noted that there were “robust signs of growth” in the second half of the financial year, and predicted that growth for the full 2017-18 financial year would be 6.75 per cent year on year, higher than the Central Statistics Office’s prediction of 6.5 per cent.
The Survey further estimated that the fading of shocks to economic activity like demonetisation together with a recovery in global demand and some domestic policy actions would raise growth in the coming financial year to 7-7.5 per cent. If this is borne out, that would mean India would again be the fastest-growing large economy in the world.
However, there are aspects to the analysis of the ongoing financial year that suggest the Survey has taken an optimistic view of growth. It admitted that in 2017-18, “fiscal deficits, the current account, and inflation were all higher than expected”. Manufacturing was still struggling, with the ratio of factory exports to GDP declining, along with the manufacturing trade balance. And agriculture has not seen an increase in real value added for four years.
Asked whether the Survey’s growth forecast was too optimistic, Subramanian said it clearly acknowledged the fact that in the first half of 2017, India’s economy “temporarily decoupled, decelerating as the rest of the world accelerated”. The reason lay in the series of actions and developments that buffeted the economy: Demonetisation, teething difficulties in the new goods and service tax (GST), high and rising real interest rates, an intensifying overhang from the twin balance sheet challenge, and sharp falls in certain food prices that impacted agricultural incomes. However, in the second half of the year, the impact of the GST and demonetisation has faded and the economy is seeing signs of revival. The agenda for the next year remains staying the course by stabilising the GST, completing the twin balance sheet actions, and staving off threats to macroeconomic stability, he said, adding his projections were less optimistic than those of the International Monetary Fund and the World Bank.
Overall, this Economic Survey contained fewer big-bang policy ideas than its predecessors, reflecting the changed and more defensive economic environment. In its workmanlike approach to the achievements of the government in the past year and the challenges for the economy going forward, the question of reviving private investment stood out.
The Survey argued that the government had taken major steps towards resolving the “twin balance sheet” problem, in which indebted companies combined with banks that had a large proportion of stressed assets to reduce the rate of investment. This problem, which the Survey described as the “festering, binding constraint” on growth, had been addressed in the past year by the movement on recognition of stressed assets, a recapitalisation package that amounted to 1.2 per cent of GDP, as well as the implementation of the asset resolution process mandated by the Insolvency and Bankruptcy Code (IBC).
The Survey indicated that movement on bank reform would aid in the recovery of the investment mechanism, a prerequisite for growth.
The Survey warned also of down-side risks to the economy, including the danger of a delayed recovery in private investment which could not be substituted by public spending given the worries about a growing general government fiscal deficit. Consumption growth might be hit by rising oil prices and elevated stock prices might engender a “sudden stall” in growth if they underwent a serious correction.
The Survey examined the reasons behind high Indian share prices and argued that what was “driving India’s valuations are a fall in the [equity risk premium, how much savers prefer shares to other assets] reflected in a massive portfolio re-allocation by savers towards equity in the wake of policy-induced reductions in the return on other assets.” In other words, demonetisation and other measures may have reduced the incentive to hold gold and real estate and raised the relative value of stocks. The Survey also highlighted the effect of recent actions on the tax front on revenue collections, insisting that personal income tax collection would hit a new record of 2.3 per cent of GDP. The Survey also claimed that, post the GST, indirect tax collections would stabilise 12 per cent higher than before.
The analysis in the Economic Survey of India’s agricultural sector will be particularly closely watched because of the political constraints on the Union government, as the general election approaches. The Survey, in addition to highlighting stagnant revenues in the farm sector, has pointed out that yields in Indian agriculture are highly sensitive to variations in rain and temperature. Thus the effects of climate change will have a serious impact on productivity in agriculture going forward; and consequently, also on farmers’ incomes, a major political priority. The Survey estimated that climate change might reduce farm incomes by 20-25 per cent in the medium term.
The Survey also used data from GST filings and the Employees’ Provident Fund Organisation to claim that formal employment in India was considerably higher than previously estimated. It said that formal employment increased by “more than 30 per cent when formality is defined in terms of social security (EPFO/ESIC) provision” and by “more than 50 per cent when [formality is] defined in terms of being in the GST net”. The Survey argues that more than half of the non-agricultural workforce is already in the formal sector, a significant departure from conventional wisdom.
The Survey included a consistent argument against the “stigmatisation” of capital that it warned would delay a growth recovery. While recent policy changes such as GST and demonetisation might raise the savings rate, the Survey marshalled cross-country data to argue that it is an investment recovery that is of greater importance for recovery. It warned that “though the cost of equity has fallen to low levels, corporates have not raised commensurate amounts of capital, suggesting that their investment plans remain modest”. The message is that further essential growth-improving reforms will crucially require an end to the stigmatisation of capital.
Chief Economic Advisor Arvind Subramanian. Photo: Dalip Kumar
*AE – Advanced Estimates by CSO. Manufacturing exports exclude oil, gold and silver; **Values for 2016 and 2017 Crop GVA estimated using real agriculture GVA to Crop GVA ratio for previous years. Real revenue (output times prices received by farmers and deflated by the CPI for agriculture) is a proxy for real incomes; Agriculture GVA is based on the financial year while real revenue is based on the calendar year. Source: AGMARKNET, Department of Revenue (CBDT), DGCIS and Survey calculations