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Insights into Editorial: Economic Survey 2016-17



Insights into Editorial: Economic Survey 2016-17




What is economic survey?

The Finance Ministry of India presents the Economic Survey in the parliament every year, just before the Union Budget. It is the ministry’s view on the annual economic development of the country. A flagship annual document of the Ministry of Finance, Government of India, Economic Survey reviews the developments in the Indian economy over the previous 12 months, summarizes the performance on major development programs, and highlights the policy initiatives of the government and the prospects of the economy in the short to medium term. This document is presented to both houses of Parliament during the Budget Session.


Highlights of the Economic Survey 20116-17:
The Indian Economy has sustained a macro-economic environment of relatively lower inflation, fiscal discipline and moderate current account deficit coupled with broadly stable rupee-dollar exchange rate. The Economic Survey 2016-17 states that such a sustenance is despite continuing global sluggishness.


It says:

  • As per the advance estimates released by the Central Statistics Office, the growth rate of GDP at constant market prices for the year 2016-17 is placed at 7.1%, as against 7.6% in 2015-16.This estimate is based mainly on information for the first seven to eight months of the financial year. Government final consumption expenditure is the major driver of GDP growth in the current year.
  • Fixed investment (gross fixed capital formation) to GDP ratio (at current prices) is estimated to be 26.6% in 2016-17, vis-à-vis 29.3% in 2015-16.
  • For 2017-18, it is expected that the growth would return to normal as the new currency notes in required quantities come back into circulation and as follow-up actions to demonetisation are taken. On balance, there is a likelihood that Indian economy may recover back to 6 ¾% to 7 ½% in 2017-18.


economic survey highlights

Key facts:

  • Indirect taxes grew by 26.9% during April-November 2016.
  • The headline inflation as measured by Consumer Price Index (CPI) remained under control for the third successive financial year. The average CPI inflation declined to 4.9% in 2015-16 from 5.9% in 2014-15 and stood at 4.8% during April-December 2015.
  • Inflation based on Wholesale Price Index (WPI) declined to (-) 2.5% cent in 2015-16 from 2.0% in 2014-15 and averaged 2.9% during April-December 2016. Inflation is repeatedly being driven by narrow group of food items, of these pulses continued to be the major contributor of food inflation.
  • Trade deficit declined to US$ 76.5 billion in 2016-17 (April-December) as compared to US$ 100.1 billion in the corresponding period of the previous year.
  • The current account deficit (CAD) narrowed in the first half (H1) of 2016-17 to 0.3% of GDP from 1.5% in H1 of 2015-16 and 1.1% in 2015-16 full year.
  • At end-September 2016, India’s external debt stock stood at US$ 484.3 billion, recording a decline of US$ 0.8 billion over the level at end-March 2016. India’s key debt indicators compare well with other indebted developing countries and India continues to be among the less vulnerable countries.
  • Agriculture sector is estimated to grow at 4.1% in 2016-17 as opposed to 1.2% in 2015-16; the higher growth in agriculture sector is not surprising as the monsoon rains were much better in the current year than the previous two years.
  • Growth rate of the industrial sector is estimated to moderate to 5.2% in 2016-17 from 7.4% in 2015-16. During April-November 2016-17, a modest growth of 0.4% has been observed in the Index of Industrial Production (IIP).
  • The eight core infrastructure supportive industries, viz. coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity registered a cumulative growth of 4.9% cent during April-November 2016-17 as compared to 2.5% during April-November 2015-16.


economic survey highlights

Economic Survey on GST and demonetisation:   

The Economic Survey 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.

  • It says, 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 Survey Report says that demonetisation has had short-term costs but holds the potential for long-term benefits. Follow-up actions to minimize the costs and maximize the benefits include: fast, demand-driven, remonetisation; further tax reforms, including bringing land and real estate into the GST, reducing tax rates and stamp duties; and acting to allay anxieties about over-zealous tax administration.
  • These actions would allow growth to return to trend in 2017-18, possibly making it the fastest-growing major economy in the world, following a temporary dip in 2016-17.
  • The Survey suggests a few measures to maximize long-term benefits and minimize short-term costs of demonetisation. 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.


Impact of Demonetisation

 Effect through end-DecemberLikely longer-term effect
Money/interest ratesCash declined sharplyCash will recover but settle at a lower level
 Bank deposits increased sharplyDeposits will decline, but probably settle at a slightly higher level
 RBI’s balance sheet largely unchanged: return of currency reduced the central bank’s cash liabilities but increased its deposit liabilities to commercial banksRBI’s balance sheet will shrink, after the deadline for redeeming outstanding notes
 Interest rates on deposits, loans, and government securities declined; implicit rate on cash increasedLoan rates could fall further, if much of the deposit increase proves durable
Financial System SavingsIncreasedIncrease, to the extent that the cash-deposit ratio falls permanently
Corruption (underlying illicit activities) Could decline, if incentives for compliance improve
Unaccounted income/black money (underlying activity may or may not be illicit)Stock of black money fell, as some holders came into the tax netFormalization should reduce the flow of unaccounted income
Private WealthPrivate sector wealth declined, since some high denomination notes were not returned and real estate prices fellWealth could fall further, if real estate prices continue to decline

Public Sector Wealth

No effect.Government/RBI’s wealth will increase when unreturned cash is extinguished, reducing liabilities


Digital transactions amongst new users (RuPay/ AEPS) increased sharply; existing users’ transactions increased in line with historical trendSome return to cash as supply normalises, but the now-launched digital revolution will continue
Real estatePrices declined, as wealth fell while cash shortages impeded transactionsPrices could fall further as investing undeclared income in real estate becomes more difficult;  but tax component could rise, especially if GST imposed on real estate
Broader economyJob losses, decline in farm incomes, social disruption, especially in cash-intensive sectorsShould gradually stabilize as the economy is remonetized
GDPGrowth slowed, as demonetisation reduced demand (cash, private wealth), supply (reduced liquidity and working capital, and disrupted supply chains), and increased uncertaintyCould be beneficial in the long run if formalization increases and corruption falls
 Cash-intensive sectors (agriculture, real estate, jewellery) were affected more.

Recorded GDP will understate impact on informal sector because informal manufacturing is estimated using formal sector indicators (Index of Industrial Production).

But over time as the economy becomes more formalized the underestimation will decline.

Recorded GDP will also be overstated because banking sector value added is based (inter alia) on deposits which have surged temporarily

Informal output could decline but recorded GDP would increase as the economy becomes more formalized
Tax collectionIncome taxes rose because of increased disclosure

Payments to local bodies and discoms increased because demonetised notes remained legal tender for tax payments/clearances of arrears

Indirect and corporate taxes could decline, to the extent growth slows

Over long run, taxes should increase as formalization expands and compliance improves



Uncertainty increased, as firms and households were unsure of the economic impact and implications for future policy

Investment decisions and durable goods purchases postponed

Credibility will be strengthened if demonetisation is accompanied by complementary measures. Early and full remonetisation essential. Tax arbitrariness and harassment could attenuate credibility


Fiscal performance of states:

The Economic Survey 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% of GSDP. The average debt to GSDP ratio has also fallen.
  • Economic Survey 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.


Labour migration:

New estimates of labour migration in India have revealed that inter-state labour mobility is significantly higher than previous estimates. 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 labour 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.
  • Migration for work and education is also accelerating. In the period 2001-2011 the rate of growth of labour migrants nearly doubled relative to the previous decade, rising to 4.5% cent 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 20-29year 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.
  • 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 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. Seven states have higher net in-migration: Goa, Delhi, Maharashtra, Gujarat, Tamil Nadu, Kerala and Karnataka.
  • Also, the costs of moving for migrants are about twice as much as they are for goods – another confirmation of popular conception.


Redistributive Resource Transfers (RRT):   

The survey also calculated Redistributive Resource Transfers’ (RRT) from the Centre (between 1994 and 2015) and value of natural resources for Indian States (over 1980 and 2014) and correlated 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.
  • Annual per capita RRT flows for all north-eastern states (except Assam) and Jammu & Kashmir have exceeded the annual per-capita consumption expenditure that defines the all-India poverty lines, especially the rural line.
  • The survey 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.
  • Thus, the existence of a ‘RRT curse’ and the lack thereof of a ‘natural resource curse’ in the context of Indian States implies that both the Centre and States need to act to mitigate the effects of the former and guard against the emergence, in future, of the latter. In this context, the question is whether RRT, in future, can be linked more saliently to fiscal and governance efforts on the part of the States.
  • 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.
  • Finally, recognizing and responding creatively to possible pathologies created by large bounties-either in the form of redistributive resources or natural resources, will be important to avoid making the errors of history.


Public Sector Asset Rehabilition Agency:

The Survey shows that our country has been trying to solve its ‘Twin Balance Sheet’(TBS) problem – overleveraged companies and bad-loan-encumbered banks, a legacy of the boom years around the Global Financial Crisis. So far, there has been limited success. The problem has consequently continued to fester: Non-Performing Assets (NPAs) of the banking system (and especially public sector banks) keep increasing, while credit and investment keep falling.

  • It says, now it is time to consider a different approach – a centralised Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.


The Survey reaches to the conclusion that a PARA may be necessary because:

  • Public discussion of the bad loan problem has focused on bank capital. But far more problematic is finding a way to resolve the bad debts in the first place.
  • Some debt repayment problems have been caused by diversion of funds. But the vast majority has been caused by unexpected changes in the economic environment after the Global Financial Crisis, which caused timetables, exchange rates, and growth rate assumptions to go seriously wrong.
  • This concentration creates a challenge since large cases are difficult to resolve, but also an opportunity since TBS could be overcome by solving a relatively small number of cases.
  • Restoring them to financial health will require large write-downs.
  • Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. And they find it hard –financially and politically—to grant them sizeable debt reductions, or to take them over and sell them.
  • It increases the costs to the government since bad debts of the state banks keep rising, and increases the costs to the economy, by hindering credit, investment, and therefore growth.
  • Since, private run Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.


Universal Basic Income (UBI) Scheme an alternative to plethora of State subsidies for poverty alleviation:

The Economic Survey has advocated the concept of Universal Basic Income (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 Father of the Nation, Mahatma Gandhi. The Survey states that the Mahatma as astute political observer, would have anxieties about UBI as being just another add-on Government programme, but on balance, he may have given the go-ahead to the UBI.

  • The Survey says the UBI, based on the principles of universality, unconditionality and agency, is a conceptually appealing idea but with a number of implementation challenges lying ahead especially the risk that it would become an add-on to, rather than a replacement of, current anti-poverty and social programmes, which would make it fiscally unaffordable.
  • Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertilizer 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.
  • Exploring the principles and prerequisites for successful implementation of UBI, the Survey points out that the two prerequisites for a successful UBI are: (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 a UBI that reduces poverty to 0.5% would cost between 4-5% of GDP, assuming that those in the top 25% income bracket do not participate. On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3% of GDP.
  • The Survey concludes that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.