Economic Survey 2016-17 – Challenges Ahead
In its annual Economic Survey for the current fiscal year(2016-17) the Government accepted that the cancellation of high value notes from circulation on November 8th would result in a sharp drop in GDP growth rate to 6.5 % from a projected 7.5% earlier. In fact the advance estimate of the Central Statistics Office put the GDP growth rate to 7.1% based on the data as obtained in the first seven/eight months of the year. The Survey accepted the short-term costs of note ban pulling down the growth rate and said that follow up actions were necessary to realise the potential for long-term benefits of the move.
The follow up actions 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. Based on the administrative success of introducing these measures growth rate for 2017-18 would be between 6.75% and 7.5%. India is likely to emerge as the fastest growing large economy in the world.
The year under review saw a lower gross fixed capital formation – fixed investment to GDP ratio at current prices is estimated lower at 26.6% in 2016-17, against 29.3% in 2015-16. Growth rate of the industrial sector is placed at 5.2% in the year under review, lower than 7.4% seen in the previous fiscal year of 2015-16.
Agriculture sector had brought some relief to the slower industrial output growth. Good monsoon helped agriculture to record 4.1% growth in 2016-17 as opposed to a mere 1.2% seen in 2015-16. The effect of note cancellation has not affected sowing of Rabi crops. Total coverage under the Rabi crops has been 5.9% higher than seen in the same period last year. Area under wheat has been higher by 7.1% and the same under gram is 10.6% higher. These two are the two most important Rabi crops in the country.
The economy withstood price pressure with headline inflation as measured by Consumer Price Index (CPI) averaging around 5% during the year. The whole sale price index (WPI) averaged 2.9% during April-December 2016. Steady price line is an encouraging factor for the Indian economy.
The decline in trade deficit during April-December 2016-17 was due more to decline in imports by 7.4%. This also illustrates the slowdown in the economic growth particularly that of the industrial sector. Exports grew at a marginal 0.7%. India’s current account deficit (CAD) narrowed to 0.3% of GDP in the first half of 2016-17 against 1.5% in the same period in 2015-16.
The Economic Survey 2016-17 accepted that the year was marked by two major domestic policy developments
- The passage of the Constitutional Amendment, paving the way for implementing click here the transformational Goods and Services Tax (GST),
- 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 Survey pointed out the external challenges facing the economy. While 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 like 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 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. Indian economy suffers from the two problems, both being legacy of the years surrounding the Global Financial Crisis – these are: over-indebted corporates and bad-loan-encumbered public sector banks.
It also accepted the existence of three long-standing challenges:
- Inefficient redistribution,
- Ambivalence about the private sector and property rights,
- Improving but still-challenged state capacity.
Universal Basic Income, according to the Survey, is an idea whose time has come.
The Economic Survey advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty. It mentioned benefits and costs of the UBI scheme. The Survey says the UBI, based on the principles of universality, unconditionality and agency, is a conceptually appealing idea but faces a number of implementation challenges, like 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. But that depends on direct benefit transfer through bank accounts and co-operation and active participation of states with sharing of costs.
The Survey says that a UBI that reduces poverty to 0.5 percent would cost between 4-5 percent of GDP, assuming that those in the top 25 percent income bracket do not participate. On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3 percent 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.