Economic Survey 2016-17 LIVE: GDP growth rate placed at 7.1 % as per the Advance Estimates by the CSO
Economic Survey 2016-17 LIVE: GDP growth rate placed at 7.1 % as per the Advance Estimates by the CSO
Live updates of Economic Survey 2016-17 which will be presented by Chief Economic Advisor Arvind Subramanian today at 1 pm.
India’s economic experience shows that the fiscal activism embraced by advanced economies- giving a greater role to counter-cyclical policies and attaching less weight to curbing debt- is not relevant for India. This observation was made in the Economic Survey 2016-17 presented by the Finance Minister Shri Arun Jaitley in the Parliament today. The Economic Survey has also stated that India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the Fiscal Responsibility and Budget Management Act (FRBM) Act 2003.
Since the 2008-09 Global Financial Crisis (GFC), internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimizing concerns about sustainability of the stocks (debt). But India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction. In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.
Even as the basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modified for the fiscal policy direction of India of today, and even more importantly the India of tomorrow. This setting out a new vision through an FRBM for the 21st century will be the task of the FRBM Review Committee.
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Short term challenge is reviving private investment (credit) and exports to boost employment creation, CEA says.
Universal Basic Income a radical new idea; an idea whose time is right for deliberation, not necessarily for immediate implementation, CEA said.
EconomicSurvey suggests setting up of a centralized Public Sector Asset Rehabilition Agency, CEA said. Economic Survey presents the idea of #UniversalBasicIncome, as a conversation with and within the Mahatma, he added.
Pointing out the risk and challenges to outlook, CEA said:
1. Domestic front, any lingering uncertatinity from demonetisation
2. External front are higher oil prices, escalating trade tension and resurgence of protectionism
3. Upside potential: Revival of exports with spillover to investment.CEA said that the balance sheets of banks and corporates are still challenged.
He exhorted the media to refrain from "misinterpreting and mischievously interpreting" GDP projections.
Giving warning, CEA said that it is "not appropriate" to do a before-after analysis of GDP growth, with resp. to demonetisation. The correct way is to analyse impact in current year with and without demonetisation.
Demonetisation simultaneously reduced supply of cash, and increased supply of deposits. Thereby increasing price of cash, and reducing price of deposits, CEA said. He said that the impact of demonetisation of Currency squeeze was less severe than perceived.
Demonetisation a very analytically unique and unusual experiment, CEA said. It has affected different forms of money very differently.
Talking about the deminetisation, CEA says that public debate on demonetisation has raise 3 issues:
Design and implementation
Costs and Benefits
Benefits of future economic policiesCEA talks about the major achievements in the past one year.
CEA says macroeconomic stability absolutely fundamental to anything the Government wants to do. We should never take this for granted.
The past year has had robust macroeconomic stability, says CEA Arvind Subramanian.
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.
Greater reliance will need to be placed on incentivizing good fiscal performance, not least because states are gradually repaying their obligations to the Centre, removing its ability to impose a hard budget constraint on them says the Economic Survey. Above all, however, incentivizing good performance by the States will require the Centre to be an exemplar of sound fiscal management itself.
The deficit reduction owes much to favorable exogenous factors:
· An acceleration of nominal GDP growth (of 6 percentage points on average after 2005) helped boost States’ revenues by about 1 percent of GSDP;
· Increased transfers from the centre of about 1 percent of GSDP both because of the 13th Finance Commission recommendations and the surge in central government revenues;
· Reduced interest payments of about 0.9 percent of GSDP on account of the debt restructuring package offered by the Centre; and
· Reduced need for spending by the States—estimated at about 1.2 percent of GDP--as the Centre took on a number of major social sector expenditures under the Centrally Sponsored Schemes (CSS).
The Economic Survey 2016-17 has 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. The Economic Survey states that the Centre’s Fiscal Responsibility and Budget Management (FRBM) Act, was mirrored by Fiscal Responsibility Legislations (FRL) adopted in the States.
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 percent of GSDP. The average debt to GSDP ratio has also fallen.
The report says that India seems to be a demographic sweet spot with its working age population projected to grow by a third over the next three decades providing it a potential the growth boost from the demographic divided which is likely to peak within next five years.
The Survey report also states that the Swachh Bharat which has the objective of ensuring safe and adequate sanitation, water security and hygiene has been a part of serious policy issue which would promote a broader fundamental right to privacy for women in the country.The major short term macro-economic challenge is to re-establish private investment and exports as the major drivers of growth and reduce reliance on Government and private consumption. Addressing the Twin Balance Sheet problem—over-indebted corporates and bad-loan-encumbered public sector banks—a legacy of the years surrounding the Global Financial Crisis will be vital.
The Economic Survey 2016-17 states that the year was also marked by some tumultuous external developments. In the short-run, world GDP growth is expected to increase because of a fiscal stimulus in the United States but there are considerable risks.
These include higher oil prices, and eruption of trade tensions from sharp currency movements, especially involving the Chinese yuan, and from geo-political factors. Another serious medium-term risk is an upsurge in protectionism that could affect India’s exports.
The Survey states that the year also saw a number of legislative accomplishments in the country. In addition to the GST, the Government:
· Overhauled the bankruptcy laws so that the “exit” problem that pervades the Indian economy--with deleterious consequences highlighted in last year’s Survey--can be addressed effectively and expeditiously;
· Codified the institutional arrangements on monetary policy with the Reserve Bank of India (RBI), to consolidate the gains from macroeconomic stability by ensuring that inflation control will be less susceptible to the whims of individuals and the caprice of governments; and
· Solidified the legal basis for Aadhaar, to realise the long-term gains from the JAM trifecta (Jan Dhan-Aadhaar-Mobile).
The Economic Survey 2016-17 presented in Parliament today states that against the backdrop of robust macro-economic stability, the year was marked by two major domestic policy developments-the passage of the Constitutional Amendment, paving the way for implementing the transformational Goods and Services Tax (GST), and the action to demonetize the two highest denomination notes.
The GST will create a common Indian market, improve tax compliance and governance, and boost investment and growth; it is also a bold new experiment in the governance of India’s cooperative federalism.
The Economic Survey states that the weighted average price of real estate in eight major cities which was already on a declining trend fell further after November 8, 2016 with the announcement of demonetization. It goes on to add that an equilibrium reduction in real estate prices is desirable as it will lead to affordable housing for the middle class and facilitate labour mobility across India currently impeded by high and unaffordable rents.
The Survey suggests a few measures to maximize long-term benefits and minimize short-term costs. One, fast remonetisation and especially, free convertibility of cash to deposits including through early elimination of withdrawal limits.
This would reduce the GDP growth deceleration and cash hoarding. Two, continued impetus to digitalization while ensuring that this transition is gradual, inclusive, based on incentives rather than controls and appropriately balancing the costs and benefits of cash versus digitalization.
Three, following up demonetisation by bringing land and real estate into the GST. Four, reducing tax rates and stamp duties. And finally, an improved tax system could promote greater income declaration and dispel fears of over-zealous tax administration.
On the benefits side, early evidence suggests that digitalization has increased since demonetisation. On the cost side, effective cash in circulation fell sharply although by much less than commonly believed – a peak of 35 percent in December, rather than 62% in November since many of the old high denomination notes continued to be used for transactions in the weeks after 8th November.
Additionally, remonetisation will ensure that the cash squeeze is eliminated by April 2017. The cash squeeze in the meantime will have significant implications for GDP, reducing 2016-17 growth by ¼ to ½ percentage points compared to the baseline of 7%. Recorded GDP will understate impact on informal sector because, for example, informal manufacturing is estimated using formal sector indicators (Index of Industrial Production). These contractionary effects will dissipate by year-end when currency in circulation should once again be in line with estimated demand, which would also allow growth to converge to a trend by FY 2017-18.
The Government says that the adverse impact of demonetisation on GDP growth will be transitional. Jaitley states that once the cash supply is replenished, which is likely to be achieved by end March 2017, the economy would revert to the normal. Therefore the real GDP growth in 2017-18 is projected to be in the range of 6¾-7½ percent.
The Economic Survey points out that demonetisation will have both short-term costs and long-term benefits as detailed in the attached table. Briefly, the costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalization, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth.
Several measures have been initiated that form part of the package approved by the Government for textiles and apparels in June 2016, the Survey notes. Accordingly, textile and apparel firms will be provided a subsidy for increasing employment, but these need to be complemented by further actions such as the following:
• An FTA with EU and UK in the case of apparel will offset an existing disadvantage by India’s competitors- Bangladesh, Vietnam and Ethiopia. In the case of leather and footwear, the FTA might give India an advantage relative to competitors. In both cases, the incremental impact would be positive.
• The introduction of the GST offers an excellent opportunity to rationalize domestic indirect taxes so that they do not discriminate in the case of apparels against the production of clothing that uses man-made fibers; and in the case of footwear against the production of non-leather based footwear.
• Third, a number of labor law reforms would encourage employment creation in these two sectors.
On logistics, the Survey says that costs and time involved in getting goods from factory to destinations are greater in India than those for other countries. On labour costs, India’s source of comparative advantage in this sector, also seem not to work in its favour due to problems like regulations on minimum overtime pay, onerous mandatory contributions that become de facto taxes for low-paid workers in small firms that result in a 45 per cent lower disposable salary, lack of flexibility in part-time work and high minimum wages in some cases.
Another problem faced by the leather sector highlighted by the Survey is that despite having a large cattle population, India’s share of cattle leather exports is low and declining due to limited availability of cattle for slaughter in India.
The Survey suggests several measures to make these sectors globally competitive and unlock its potential for creating new jobs and generating growth. It recommends that there is a need to undertake rationalization of domestic policies which are inconsistent with global demand patterns.
According to the Survey, in both apparel and footwear sectors, tax and tariff policies create distortions that impede India gaining export competitiveness. India imposes a 10 percent tariff on man-made fibers vis- a-vis 6 percent on cotton fibres. On the other hand, domestic taxes also favor cotton-based production rather than production based on man-made fibers, and leather footwear rather than non leather footwear.
The global demand for apparel is moving from cotton fibre products to manmade fibre and similarly footwear of non leather, it adds. India’s competitors enjoy better market access by way of zero or at least lower tariffs in the two major importing markets, namely, the United States of America (USA) and European Community (EU), the Survey says.
The Survey highlights the opportunity for India in this (Apparel and Leather industry) sector in global context by saying that India has an opportunity to push exports since rising wage levels in China has resulted in China stabilizing or losing market share in these products. India is well positioned to take advantage of China’s deteriorating competitiveness due to lower wage costs in most Indian states, it adds.
Apparel and Leather industry:
Apparel and Leather & Footwear sectors are eminently suitable for generating jobs that are formal and productive, providing bang-for-buck in terms of jobs created relative to investment and generating exports and growth.
The Survey adds that these sectors provide immense opportunities for creation of jobs for the weaker sections, especially for women, and can become vehicles for broader social transformation in the country.
Fourth, the patterns of flows of migrants found in this study are broadly consistent with what is expected - less affluent states see more out migration migrating out while the most affluent states are the largest recipients of migrants.
The strong positive relationship between the CMM scores and per capita incomes at the state level. Relatively poorer states such as Bihar and Uttar Pradesh have high net out-migration. Seven states take positive CMM values reflecting net in-migration: Goa, Delhi, Maharashtra, Gujarat, Tamil Nadu, Kerala and Karnataka.
Fifth, the costs of moving for migrants are about twice as much as they are for goods – another confirmation of popular conception.
Third, and a potentially exciting finding, for which there is tentative but no conclusive evidence, is that while political borders impede the flow of people, language does not seem to be a demonstrable barrier to the flow of people.
For example, a gravity model indicates that political borders depress the flows of people, reflected in the fact that migrant people flows within states are 4 times than migrant people flows across states. However, not sharing Hindi as a common language appears not to create comparable frictions to the movement of goods and people across states.
The second finding from this new study is that migration for work and education is accelerating. In the period 2001-2011 the rate of growth of labour migrants nearly doubled relative to the previous decade, rising to 4.5% per annum. Interestingly, the acceleration of migration was particularly pronounced for females and increased at nearly twice the rate of male migration in the 2000s.
There is also a doubling of the stock of inter-state out migrants to nearly 12 million in the 20-29 year old cohort alone. One plausible hypothesis for this acceleration in migration is that the rewards (in the form of prospective income and employment opportunities) have become greater than the costs and risks that migration entails. Higher growth and a multitude of economic opportunities could therefore have been the catalyst for such an acceleration of migration.
Labour migration in India:
New estimates of labour migration in India have revealed that inter-state labor mobility is significantly higher than previous estimates.
The new Cohort-based Migration Metric(CMM) shows that inter-state labor mobility averaged 5-6.5 million people between 2001 and 2011, yielding an inter-state migrant population of about 60 million and an inter-district migration as high as 80 million.
The first-ever estimates of internal work-related migration using railways data for the period 2011-2016 indicate an annual average flow of close to 9 million migrant people between the states. Both these estimates are significantly greater than the annual average flow of about 4 million suggested by successive Censuses and higher than previously estimated by any study.
The Economic Survey 2016-2017, also suggests providing a part of the RRTs or to redistribute the gains from resource use as a Universal Basic Income (UBI) directly to households in relevant states which receive large RRT flows and are more reliant on natural resource revenues.
The Economic Survey 2016-17 points out that there is no evidence of a positive relationship between these transfers and various economic outcomes, including per capita consumption, GSDP growth, development of manufacturing, own tax revenue effort, and institutional quality.
Instead, there is a suggestive evidence of a negative relationship. For example, larger RRT flows seem to negatively affect fiscal effort (defined as the share of own tax revenue to GSDP). These trends are robust to alternative definitions of RRT.
Also, whether mineral rich states like Jharkhand, Chhattisgarh, Odisha, Rajasthan and Gujarat ,are doing well on the metrics of economic outcomes and governance is considered in the context of redistributive transfers. However, this does not reveal conclusive results and there is no evidence of a negative relationship between fiscal effort and reliance on revenue from natural resources over the period 2001-14.Economic Survey 2016-17 examines whether the effects associated with the “aid curse” and the “natural resources curse” internationally are discernible in the context of the Indian States. It calculates Redistributive Resource Transfers’ (RRT) from the Centre (between 1994 and 2015) and value of natural resources for Indian States (over 1980 and 2014) and correlates these with several economic outcomes and an index of governance.
Redistributive Resource Transfer or RRT to a state (from the Centre) is defined as gross devolution to the state adjusted for the respective state’s share in aggregate Gross Domestic Product(GDP). The top 10 recipients are: Sikkim, Arunachal Pradesh, Mizoram, Nagaland, Manipur, Meghalaya, Tripura, Jammu and Kashmir, Himachal Pradesh and Assam.
According to the Survey, redistribution by the government is far from efficient in targeting the poor. This is intrinsic to current programs because spending is likely to be greatest in states with better institutions and which will therefore have fewer poor.
The Survey notes that over the past two years, the government has made considerable progress toward reducing subsidies, especially related to petroleum products. Technology has been the main instrument for addressing the leakage problem and the pilots for direct benefit transfer in fertilizer represent a very important new direction in this regard, the Survey adds.
The Survey highlights difficulties in privatizing public enterprises, even for firms where economists have made strong arguments that they belong in the private sector. In this context, the Survey points towards the need to further privatize the Civil Aviation, Banking and Fertilizer sectors.
The Survey points out that the capacity of the State in delivering essential services such as health and education is weak due to low capacity, with high levels of corruption, clientelism, rules and red tape. At the level of the states, competitive populism is more in evidence than competitive service delivery, the Survey adds. Constraints to policy making due to strict adherence to rules and abundant caution in bureaucratic decision-making favours status quo, the Survey cautions.
Economic Survey 2016-17 stated that India needs an evolution in the underlying economic vision across the political spectrum and further reforms are not just a matter of overcoming vested interests that obstruct them.
The Survey lists the some of the challenges that might impede India’s progress. These challenges are classified by the Survey as follows: ambivalence about property rights and the private sector, deficiencies in State capacity, especially in delivering essential services and inefficient redistribution.
Highlights of what Jaitley said:
Since the 2008-09 Global Financial Crisis (GFC), internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimizing concerns about sustainability of the stocks (debt).
But India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns.
India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction. In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.
Even as the basic tenets of the FRBM remain valid, the operational framework designed in 2003 will need to be modified for the fiscal policy direction of India of today, and even more importantly the India of tomorrow. This setting out a new vision through an FRBM for the 21st century will be the task of the FRBM Review Committee.
India’s economic experience shows that the fiscal activism embraced by advanced economies- giving a greater role to counter-cyclical policies and attaching less weight to curbing debt- is not relevant for India. This observation was made in the Economic Survey 2016-17 presented by the Finance Minister Arun Jaitley in the Parliament today.
The Economic Survey has also stated that India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the Fiscal Responsibility and Budget Management Act (FRBM) Act 2003.
(Source Ministry of Finance)
Coming back to the Economic Survey 2016-17, the Finance Ministry is likely to suggest a Universal Basic Income (UBI) for the poor.
Bloomberg reported that the ministry has suggested replacing subsidies with a universal basic income plan for the poor through direct transfers to their bank accounts. Finance ministry spokesperson DS Malik declined to comment.
The Economic Survey of last year, i.e. 2015-16 had said, "Subsidies for the poor tends to attract policy attention. But a number of policies provide benefits to the well-off. We estimate these benefits for the small savings schemes and the tax/subsidy policies on cooking gas, railways, power, aviation turbine fuel, gold and kerosene, making assumptions about the definition of “well-off” and the nature of neutral policies."
On agriculture front, Mukherjee said that the pulse prices are under control after the government took proactive steps. He emphasised that the government's focus has been on "holistic development" of the farm sector.
"Honourable members may recall that soaring prices of pulses was a matter of grave concern around this time last year. My government has taken proactive steps, and prices of pulses are now under control," Mukherjee said.
To ensure fair price for farmers and to protect consumers, he said the government has created a buffer stock of 20 lakh tonnes of pulses, against which 8 lakh tonnes have already been procured.
Touching on the demonetisation decision, the President said the resilience and forbearance demonstrated by the countrymen especially the poor, recently in the fight against blackmoney and corruption, is remarkable.
Later again, referring to the issue, he said, "My Government has taken bold decisions in the interest of the poor."
To combat evils of blackmoney, corruption, counterfeit currency and terror financing, Mukherjee said the government took the decision on November 8 to demonetise old 500 and 1000 rupee currency notes.
"My government's very first cabinet decision (in 2014) was to set up a SIT on blackmoney. The passing of Blackmoney (Undisclosed Foreign Income and Assets) and Imposition of Tax Act 2015, Benami transactions (Prohibition) Amendment Act, 2016, Amendments to treaties with Singapore, Cyprus and Mauritius to prevent misuse of provisions in such treaties for tax evasion and movement of blackmoney in India and the Taxation Amendment Act providing for Pradhan Mantri Garib Kalyan Yojana, have together resulted in a comprehensive policy backed initiative against blackmoney," he said.
(From PTI inputs)
Mukherjee referred to the government's demonetisation decision to fight blackmoney and corruption and as also the surgical strikes across the LoC as bold decisions, both of which were received with thumping of desks by members.
"Frequent elections put on hold development programmes, disrupt normal public life and impact essential services and burden human resource with prolonged period of election duty.
"My government welcomes a constructive debate on simultaneous conduct of elections to Lok Sabha and state legislative assemblies. Funding of elections to eradicate misuse of money power also needs to be debated," he said.
Last year, the Economic Survey 2015-16 started off by stating, "This year’s Economic Survey comes at a time of unusual volatility in the international economic environment." It termed India as being in a "sweet spot" arising from a combination of a strong political mandate and a favourable external environment.
Before the presentation of the survey, Presiden Pranab Mukherjee addressed to the joint sitting of the two Houses. He said the government has provided over Rs two lakh crore through 5.6 crore loans sanctioned under the Pradhan Mantri Mudra Yojana.
The President said that core of the government`s policies was welfare of the poor, Dalits, farmers, labourers and the youth.
Ministry of Finance will be presenting Economic Survey for 2016-17 shortly in the Parliament session ahead of Union Budget FY18. The survey analyses the trends in money supply, exports, imports, industrial output, and other macro-economic factors. The Survey will be tabled at 1 pm.
It is presented by Chief Economic Adviser (CEA) Arvind Subramanian. Reportedly, this year's theme of the Economic Survey, could be 'Universal Basic Income'.
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