India looks on to Finance Minister and his team to fasten pace of inclusive economic growth and development in Union Budget 2017-18
India looks on to Finance Minister and his team to fasten pace of inclusive economic growth and development in Union Budget 2017-18

Economic Survey allays India’s slowdown fears; pegs GDP growth @ 7.5% 

Allaying the daunting fears of a major slowdown due to the the adverse impact of demonetisation on GDP growth. The Economic Survey points out that demonetisation will have both short-term costs and long-term benefits. Briefly, the costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalisation, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth.

Its estimated that the cash squeeze in the meantime as far as GDP is concerned reduced 2016-17 growth by ¼ to ½ percentage points compared to the baseline of 7 percent. However, the Economic Survey 2017 presented in Parliament just prior to the the Union Budget 2017 by the union Finance Minister, Arun Jaitley stated 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 Prime Minister, Narendra Modi addressing media ahead of Budget Session of Parliament.

The Prime Minister, Narendra Modi addressing media ahead of Budget Session of Parliament.

On the benefits side, early evidence suggests that digitalisation 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 percent 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. 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.

Demonetisation made real estate prices affordable for genuine buyers

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 demonetisation. 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.

GST to boost investment and growth

As per the Economic Survey 2016-17 in 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 demonetise 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.

Need for sound fiscal management 

The Economic Survey 2016-17 also 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.

Also, from global perspective, 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. 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 minimising 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. As per the said Economic Survey, 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. 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.

Labour migration in India increasing at an accelerating rate


Courtesy: Economic Survey 2016-17

New estimates of labour migration in India have revealed that inter-state labor mobility is significantly higher than previous estimates. As part of the survey, the study based on the analyses of new data sources and new methodologies also shows that the migration is accelerating and was particularly pronounced for females. The data sources used for the study are the 2011 Census and railway passenger traffic flows of the Ministry of Railways and new methodologies including the Cohort-based Migration Metric (CMM) .

 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.

Reforms to unleash economic dynamism and social justice 

Courtesy: Economic Survey 2016-17

Courtesy: Economic Survey 2016-17

Going forward, India needs an evolution in the underlying economic vision across the political spectrum to further reforms. As, the Economic Survey has also listed the some 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.

The Survey highlights difficulties in privatising 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 privatise the Civil Aviation, Banking and Fertiliser 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.

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 fertiliser represent a very important new direction in this regard, the Survey adds.

Noting that India has come a long way in terms of economic performance and reforms, Economic Survey 2016-17 says that there is still a journey ahead to achieve dynamism and social justice. Completing this journey will require broader societal shifts in the underlying vision, the Survey adds.

The 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.

In fact the Economic Survey 2016-2017, 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. Nitably, UBI as an alternative to the various social welfare schemes in an effort to reduce poverty. The survey juxtaposes the benefits and costs of the UBI scheme in the context of the philosophy of the

Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertiliser subsidy) across districts, the Economic Survey points out that the districts where the needs are greatest are precisely the ones where State capacity is the weakest. This suggests that a more efficient way to help the poor would be to provide them resources directly, through a UBI. Hence, the Survey concludes that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.

Making Apparel and Leather sector globally competitive key to job creation 

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. This was stated in the Economic Survey 2016-17 presented by the Finance Minister Shri Arun Jaitley on 30 January 2017, a day ahead of of the Union Budget 2017. 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. The Survey highlights the opportunity for India in this sector in global context by saying that India has an opportunity to push exports since rising wage levels in China has resulted in China stabilising 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.

Fresh Update- (as on 9 April 2017)

CII Business Confidence Index scores an all-time high in the Jan-March Quarter as Sentiment Improves within Industry

Amidst expectations that economic activity would gather pace in the current year, there is optimism among companies that green shoots of recovery, which have started becoming evident, would be sustained. This finds a reflection in the CII Business Confidence (BCI) which has gone up to an all-time high of 64.1 during the fourth quarter of 2016-17 as against 56.5 recorded in the previous quarter. There has been a sharp rise in the CII-BCI after it remained subdued in the last few quarters.

Chandrajit Banerjee  on CII’s 98th edition of quarterly Business Outlook Survey

Chandrajit Banerjee on CII’s 98th edition of quarterly Business Outlook Survey

Commenting on the recent rebound in Business Confidence, Chandrajit Banerjee, Director General, CII stated that the turnaround in business expectations, as indicated in the survey, gives credence to the belief that a new growth narrative is being scripted for the country based on improved business sentiment and investor confidence. A sharp uptick in business outlook, at the onset of 2017, underpins the hope that the reform initiatives of the government would unravel a host of investment opportunities for firms, going forward.

These findings are a part of CII’s 98th edition of quarterly Business Outlook Survey, which was based on around 200 responses from large, medium, small and micro firms, covering all regions of the country.

The significant rise in the index this quarter could be attributed to the distinct improvement in the Expectations Index even as there is a marginal uptick in the Current Situation Index, indicating that business sentiment is strong and firms are particularly upbeat about activity in their sectors in the future.

Business conditions are expected to improve as over 63% of the firms expect an increase in sales in Jan-Mar 2017, as compared to only 39% who experienced the same in October-December 2016.

On similar lines, 60 per cent of the respondents anticipate an increase in new orders during Jan-Mar 2017 as compared to 41.0 per cent who witnessed the same in the preceding quarter. Much of the recovery in business conditions is expected to be domestically driven as a large proportion of firms (61.8%) expect to maintain status quo on their export orders in Jan-Mar 2017.

In an indication that the turn of the investment cycle is now imminent, firms expect an improvement in capacity utilization in the fourth quarter of FY17. This is borne out from the fact that around 65 percent of respondents expect capacity utilization levels to be above 75% while only 36 percent of respondents experienced the same in the Oct-Dec 2016 quarter.

Despite the rise in capacity utilization, majority of firms expect no change in their domestic and international investment plans in Jan-Mar 2017. More than half of the firms expect to maintain status quo on their plans about investing in the domestic economy in the Jan-Mar 2017 quarter. Firms are keeping investment plans on hold despite the expectation of an improvement in sales and new orders in the Jan-Mar 2017 quarter owing to the existing excess capacity in the economy.

Firms, when asked to rank their concerns in the coming six months, have stated low domestic demand followed by fragile global economic recovery and rise in commodity prices as their key concerns.


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