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Key takeaways from the Annual Economic Survey 2016-17…

Economy | Published on Jan 31st 2017 | Comment(s) 0
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The Annual Economic Survey, which acts as the precursor to the Union Budget, was presented on 31st January; a day ahead of the Union Budget. The Economic Survey is important because it comes in the light of some interesting macroeconomic developments. The GDP growth, which had originally promised to beat Chinese GDP growth by over 100 bps, had shown signs of slowing down. Secondly, the government had undertaken a massive demonetization exercise in Nov-Dec 2016 and that had impacted liquidity and output. It was therefore essential to understand the actual impact of demonetization. Thirdly, the Economic Survey comes in the months running up to the implementation of GST on July 01st 2017 and GST is expected to be a game-changer for GDP growth. Finally, there have been key global events with long term ramifications for India like BREXIT, investment revival in China and the US moving increase towards inward-looking isolationism. It is in this backdrop that the Economic Survey 2016-17 was announced…

 

Structure of the Economic Survey 2016-17…

 

To the credit of the Chief Economic Advisor (CEA), Mr. Arvind Subramanian who authored the Economic Survey, the entire survey has adopted a uniquely analytical perspective. The first part of the Economic Survey deals with “The Perspective View”. This focuses on a long term view of India’s economic vision as well as the economic and social challenges that need to be overcome to achieve these long term goals. The second part of the Survey deals with “The Proximate View”. This part focuses on the near term challenges. These include addressing the outcome of demonetization, leveraging fiscal policy, challenges to India’s balance sheet and the strategy to create more jobs. The third part of the Survey deals with “The Persistent Perspective”. This section on the medium term challenges focuses on empowering the states to a greater extent so that the real benefits of Cooperative Federalism are achieved. For the purpose of our analysis, we focus more on the Proximate View and its four components.

 

Key perspectives on growth and monetary policy…

 

The Economic Survey pegs the GDP growth for the fiscal year 2017-18 in the range of 6.75-7.5%. For the current fiscal 2016-17, the GDP growth is pegged at 7.1%, which is nearly 50 bps below the original estimates in the beginning of the year. However, if the global context does not remain conducive, then India’s GDP growth for 2017-18 may gravitate toward the lower end of the range. The Survey also sees distinct price risks to inflation in the coming fiscal and believes that the stickiness of non-core inflation will prove to be a cap on aggressive rate cuts by the RBI. However, notwithstanding the RBI signal on rates, the survey feels that the glut of liquidity in the banking system post demonetization will keep interest rates subdued. The survey has also mooted the topic of Universal Basic Income (UBI), which could cost the government nearly 4-5% of GDP. If this is implemented, the Survey feels it could be a game changer for the Indian economy.

 

What will be the overall impact of demonetization?

 

This is a question for which people have been looking for answers from the Economic Survey. At a perspective level, the Survey has emphasized that while the focus of demonetization debate has been overly on the impact on cash business, the debate may have ignored the salutary impact on the non-cash and digital business. Recent sales numbers coming from auto and FMCG companies seem to corroborate the view that the crunch on cash transactions may have been largely compensated for by non-cash or digital transactions. The Economic Survey, however, cautions that one cannot underestimate the short term impact of demonetization on GDP and the short term impact on GDP in 2016-17 could be between 25 to 50 basis points. This pressure was already visible in the advance estimates of GDP that came out recently. The Survey is also confident that the negative effects of demonetization will gradually dissipate by the end of April 2017 and therefore the impact of demonetization may not be too visible in the next fiscal year 2017-18.

 

Cautions on laxity on fiscal deficit…

 

To understand this point made by the Economic Survey, one needs to understand the recent debate on fiscal deficit. While the government may have a strong case for relaxing fiscal deficit targets to pump prime growth, the Survey warns against that experiment. Globally, the focus has been on counter-cyclical fiscal policy which implies letting fiscal deficit spiral in low growth periods and controlling fiscal deficit in high growth periods. However, the survey cautions that this approach may not be applicable in the Indian context. Higher fiscal deficit will mean greater vulnerability to downgrades and currency volatility, risks that the Indian economy cannot afford at this point of time, considering its dependence on global portfolio flows and FDI flows.

 

Finally, what the Economic Survey is advising…

 

  • To increase revenues in India, the survey recommends broadening and widening the collection of property tax as only 10-20% of the potential is being achieved across major geographies in India.

 

  • The Survey has rightly called for the creation of Public Sector Asset Rehabilitation Agency (PARA), which will be the equivalent of a bad bank to take over the bad assets of PSUs. Additionally, this agency can also deal with stressed assets for sectors where normal banking approaches are not applicable.

 

  • The Survey concludes that the demonetization may have created short term pain but the long term benefits in terms of shift to digitization, better audit trails, cleaner money in the system will far outweigh the short term pain caused by demonetization.

 

  • The Survey has mooted the idea of Universal Basic Income (UBI) for the first time. UBI is about assuring basic income to every person, something most advanced nations already have in place. It will act as a demand booster and also as a social security net for the population. The cost of 4-5% of GDP could be worth it, according to the Survey.

 

  • Finally, the Survey has cautioned on the deteriorating fiscal position of State Governments due to a combination of Pay Commission payouts and Uday Bonds. The centre needs to intervene to help the states keep their fiscal deficit within manageable levels!




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