The Economic Survey 2016-17 tabled today in the Parliament by the Union Finance Minister Shri Arun Jaitley reflects the Indian economy’s resilience to turbulent external environment, as well as extreme governance measures. In accordance with projections that real GDP growth rate would range between 7.0 and 7.5 percent, the economy has recorded a growth rate of 7.0 percent during the fiscal year 2016-17. GDP growth rate is now targeted at 6.75 percent-7.5 percent for 2017-18, with the International Monetary Fund also revising its growth projection for India downwards to 6.6 percent for 2016-17 and 7.2 percent in 2017-18.

Much of the deceleration in India’s GDP growth rate has been attributed to the November 8, 2016 note ban by the Government, which has shaved off the economic growth for the current fiscal by 0.25 per cent to 0.50 per cent. The demonetisation efforts, although reducing discretionary consumer spending and cash money supply in the short term, are expected to bolster economic activity in the medium and long-terms. Transparency through greater digitalisation and tax compliance will increase tax-based revenue collection, with these benefits expected to be evident by as early as April 2017 with remonetisation coming into effect. The impact on the informal sector is expected to normalise by year-end, with currency in circulation expected to align with demand, and, allow growth to converge to a trend by FY 2017-18.

Volatility in the international economic environment, coupled with increased capital expenditure and governance efforts by the government last year had encouraged predictions that India would be amongst the world’s fastest growing economies in 2016-17. With speedy remonetisation measures, incentivisation to create a robust digital economy, early elimination of withdrawal limits, inclusion of land and real estate in GST, and reduction of tax rates and stamp duties, the country can be expected to continue to maintain its momentum as one of the world’s fastest growing economies.

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 Gross State Domestic Product (GSDP).

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The average debt to GSDP ratio has also fallen. However, the fiscal challenges are likely to mount for the states owing to the Pay Commission recommendations, and increasing payments from the UDAY bonds. Therefore, the Survey recommends to continue fiscal prudence both by the Centre as well as the States and to incentivise good fiscal performance, to maintain overall fiscal health of the economy.

The Survey has suggested setting up of a centralised Public Sector Asset Rehabilitation Agency (PARA) to solve the stressed asset problem. It suggests that the PARA could be given the charge of working out the largest and most complex cases in a centralised manner. This approach, as per the Survey could eliminate most of the obstacles currently plaguing loan resolution. It could solve the coordination problem, since debts would be centralised in one agency; it could be set up with proper incentives by giving it an explicit mandate to maximise recoveries within a defined time; and it would separate the loan resolution process from concerns about bank capital. On PARA’s functions, broadly, the Survey suggests that it could purchase specified loans (for example, those belonging to large, over-indebted infrastructure and steel firms) from banks and then help resolve it. This could be done either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments of the value-maximising strategy.

3.5% fiscal deficit, down from 3.9%

0.3% CAD, down from 1.5%

3.4% WPI inflation, up from -2.5%

3.4% CPI inflation, down from 4.9%

Net INR 23,079 cr FPI outflow

4.1% agri growth, up from 1.2%

5.2% industry growth, down from 7.4%

8.8% service sector growth, down from 8.9%

4.6% trade deficit, improved from 7.6%

3.2% net FDI growth, up from 1.7%

Nominal growth, of USD 11.8 bn forex reserve

16.4% Revenue Expenditure growth up from 3.2%

-10.4% Capital Expenditure growth, down from 30.8%

Annual GDP Growth

2014-15 2015-16 2016-17

7%

7.6%

7.2%

The government would then recapitalise them, thereby restoring financial health and allowing them to shift their resources – financial and human – back towards the critical task of making new loans. Similarly, once the financial viability of the over-indebted enterprises is restored, they will be able to focus on their operations, rather than their finances. And they will finally be able to consider new investments.

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Outlook for 2017-18 As per the Survey, India’s exports are likely to recover, based on an uptick in global economic activity. This is expected to continue in the aftermath of the US elections and expectations of a fiscal stimulus. The Economic Survey also projects that given the high elasticity of Indian real export growth to global GDP, exports could contribute to higher growth next year, by as much as 1 percentage point. The estimate for private consumption is less clear as international prices of crude oil have started to trend up after remaining stable for much of the last two years. This along with rise in the prices of other commodities like coal, etc. could exert inflationary pressure and have the potential to adversely impact the trade and fiscal balance, considering the significant reform measures initiated by the government.

The fiscal outlook for the central government for next year will be marked by three factors. First, the increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years, owing to the oil windfall will disappear.

Second, there will be a fiscal windfall both from the high denomination notes that are not returned to the RBI and from higher tax collections because of increased disclosure under the Pradhan Mantra Garib Kalyan Yojana (PMGKY). These are likely to be one-off in nature, and in both cases the magnitudes are likely to be uncertain.

A third factor will be the implementation of the GST, which is likely to be implemented later in the fiscal year. The transition to GST, admittedly, is complicated from an administrative and technology perspective. Therefore, revenue collection will take some time to reach full potential. Combined with the fact that government is committed to compensate the states for any shortfall in their own GST collections, the Survey indicates that the outlook must be cautious with respect to revenue collections. The fiscal gains from implementing the GST and demonetisation is likely to take time to be fully realised.

The Survey has also advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes to reduce poverty. The suggestion for a universal income assumes that the two prerequisites for a successful UBI are in place i.e., (a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and (b) Centre-State negotiations on cost sharing for the programme. The Survey says that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.

Global events, like the Brexit referendum and anticipated protectionist measures by US President Donald Trump are expected to significantly affect global trade.

India is well positioned to take advantage of China’s deteriorating competitiveness due to lower wage costs in most Indian states. The Survey suggests that the 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 suggests a few measures to maximise long-term benefits and minimise short-term costs. One, fast remonetisation and early elimination of withdrawal limits. This would reduce the GDP growth deceleration and cash hoarding. Two, continued impetus to digitalisation while ensuring that this transition is gradual, inclusive, based on incentives rather than controls and appropriately balancing the costs and benefits of cash versus digitalisation. 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.

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Anticipated Key Initiatives

Universal Basic Income Public Sector Asset Rehabilitation

Agency

➡ Poverty and vulnerability will be reduced in one broad stroke ➡ Beneficiaries treated as agents, citizens entrusted with using

monetary welfare benefits as per their preferences ➡ All individuals targeted, exclusion error of poor being left out is

minimal, although 60 percent inclusion error of rich gaining access to the scheme

➡ Income floor to provide a safety net against health, income and other shocks

➡ Encourage greater use of bank accounts, endogenous improvement in financial inclusion

➡ Increased income will enable access to credit to those with low income levels

➡ Guaranteed income will reduce pressures of finding basic living on a daily basis

➡ Replaces plethora of separate government schemes, reducing administrative burden on the state

➡ Address Twin Balance Sheet problem of overleveraged companies and bad-loan-encumbered banks

➡ Make politically difficult decisions to reduce debt

➡ Maximise recoveries within a defined time through resolution of a small number of large, complex cases in a centralised manner

➡ Separate loan resolution process from concerns about bank capital

➡ Purchase specified loans from banks and then help resolve debt

• Cut in individual income tax and real estate stamp duty • Gradual widening of income tax net • Harness property tax potential to increase city incomes • Accelerate cuts in corporate tax • Inclusion of land & real estate in Goods & Service Tax • Improve tax administration to reduce discretion & improve accountability

Tax Reform

Incentive for digital economy

Rapid remonetisation & early removal of cash withdrawal limits

Labour & tax reform to make Indian apparel & leather industry globally competitive

• GDP can grow and economy stabilise with remonetisation • Corporate taxes can increase with formalization and compliance requirements • Cash shortage to resolve, but at lower levels • Decline in loan rates anticipated on condition of deposit increases • Reduced corruption and flow of unaccounted income if compliance adequately incentivized • Decline in personal wealth expected if real estate sector does not recover • Public sector liabilities will reduce, increasing overall wealth of government/RBI • Digital transactions expected to maintain momentum; cash-based transactions expected, but at lower levels • Real estate prices expected to fall with a higher tax liability if real estate sector included in GST • Reduced tax arbitrarinessFuture impact of

demonetisation

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