Prelude to the Union Budget for FY20
The Finance Minister tabled the Economic Survey (ES) for FY19 in
the Parliament yesterday. The 694 page document, divided in three parts, deals
with a variety of issues and offers extensive data on Indian economy.
In past few years we have seen marked change in the ES document
- the way it is prepared and presented, and also the content. Traditionally ES
used to be eponymous to its name - "survey of economic activities" in
previous fiscal year. The objective ostensibly was to provide a basis for the
preparation of the budget for next fiscal year. But since past few years, ES
has become more of a explanation on policy direction.
This year ES has taken a further leap. It has become statement
of political vision and commitment. Obviously there are claims and data that
may not be entirely incontrovertible, but I would deliberately avoid venturing
into the controversy street.
Nonetheless, after spending more than 6hrs trying to decipher
the key message, I am reminded of the following dialogue from my all time
favorite TV series Yes Minister:
"Civil servants have an extraordinary genius for
wrapping up a simple idea to make it sound extremely complicated."
Economic Survey FY19 (ES19) - Key points
Guide to policy direction
(a) The acceptance
for Chinese model of growth is conspicuous and overwhelming. The sense of
regret of having missed on the massive industrial growth opportunity offered by
the shift of manufacturing from developed economies to emerging economies in
past three decades could be seen everywhere. The intent is clearly to catch up.
(b) The Survey quotes
both Deng Xiaoping and Vedic scriptures, perhaps to show an intent to maintain
a balance in public policy. The idea is to achieve goals by nudging the
peoples' behavior gently in the desired direction, rather than coercing them.
ES states-
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"...behavioural economists have discovered the efficacy of a new class of “nudge” policies that lie between laissez faire and incentives. Such policies leverage insights from human psychology to influence the choice architecture of people. Nudge policies gently steer people towards desirable behaviour even while preserving their liberty to choose."
(c) The realization
to create a strong employment ecosystem is growing deeper. The new industrial
policy and incentive structure will obviously be guided by this consideration.
This essentially means productivity, sustainability and innovation get due
consideration in incentive policy for MSME. ES makes the intent clear-
"To unshackle MSMEs and thereby enable them to grow, all
size based incentives must have a sunset clause of less than ten years with
necessary grand-fathering. Deregulating labour law restrictions can create
significantly more jobs, as seen by the recent changes in Rajasthan when
compared to the rest of the states."
(d) The scare of
questionable data integrity and apprehensions about misuse of personal data
(transactional as well as authentication) is also visible. ES suggests the way
forward as follows:
"Through Aadhaar, India has been at the forefront of the
data and technology revolution that is unfolding. As data for social welfare
may not be generated by the private sector in optimal quantity, government
needs to view data as a public good and make the necessary investments. The
benefits of creating data as a public good can be generated within the legal
framework of data privacy. Going forward, the data and information highway must
be viewed as equally important infrastructure as the physical highways. Such a
stance can help India leapfrog to utilise the benefits of technological
advances for the welfare of its people. In the spirit of the Constitution of
India, data “of the people, by the people, for the people” must therefore
become the mantra for the government."
(e) Legal reforms
get its due place in economic policy discussion as a pre condition for
achieving greater Ease of Doing Business. ES opens the discussion with the
following-
"The relationship between economic governance and the Rule
of Law (Dandaniti) has been emphasized by Indian thinkers since ancient times.
It is seen as the key to prosperity, and a bulwark against Matsyanyaya (i.e.
law of the fish/jungle). It should be no surprise, therefore, that the Preamble
to the Constitution of India defines that the first role of the State is ‘to
secure for all its citizens: Justice, social, economic, and political’. In
other words, it is well accepted that economic success and prosperity are
closely linked to the ability to enforce contracts and resolve disputes."
(f) ES adequately
emphasizes on the importance of "policy certainty in realizing the
objective high economic growth. ES recognizes-
"...a nation state that ensures
predictability of policy action, provides forward guidance on policy action,
maintains broad consistency in actual policy with the forward guidance, reduces
ambiguity and arbitrariness in policy implementation creates economic policy
certainty. Investors may enjoy the certainty provided by such an environment
and flock to invest in this environment."
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(g) Most significantly, ES draws attention to the problem of graying India. This means greater focus on healthcare, more dependency, old age pension, social security, retirement planning and all other attendant problems.
"It will surprise many readers to learn that population
in the 0-19 age bracket has already peaked due to sharp declines in total
fertility rates (TFR) across the country. The southern states, Himachal
Pradesh, Punjab, West Bengal and Maharashtra now have fertility rates well
below the replacement rate. TFR in Bihar, Uttar Pradesh, Jharkhand,
Chhattisgarh, Rajasthan and Madhya Pradesh are above the replacement rate but
are also experiencing significant declines. As a result, the national TFR is
expected to be below replacement level by 2021 (adjusted for the skewed gender
ratio, it may already be there)."
(h) Energy poverty
identified as key growth impediment.
"Energy is the mainstay of the development process of
any economy.....Compared to the income dimension of poverty, its energy
dimension is even more severe......India’s economic future and prosperity is
dependent on her ability to provide affordable, reliable and sustainable energy
to all her citizens."
State of the Economy
1. Global
Economy: 2018 was a challenging year for global economy. World's GDP growth
fell to 3.6% in 2018 from 3.8% in 2017. Growth rate of world output is
projected to fall further to 3.3 per cent in 2019 as growth of both advanced
economies and emerging & developing economies are expected to decline.
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2. Indian Economy: Growth of the Indian economy moderated in 2018-19 with a growth of 6.8 per cent, slightly lower than 7.2 per cent in 2017-18. Inflation was contained within 4 per cent. The current account deficit to GDP was higher in 2018-19 as compared to 2017-18, primarily due to higher oil prices, which were about 14 $/bbl higher in 2018-19 vis-Ã -vis the previous year. However, the current account deficit started to narrow in the third quarter of the year. The manufacturing sector was characterised by higher growth in 2018-19 while the growth in agriculture sector witnessed tapering. Growth in investment, which had slowed down for many years, has bottomed out and has started to recover since 2017-18. In fact, growth in fixed investment picked up from 8.3 per cent in 2016-17 to 9.3 per cent in 2017-18 and further to 10.0 per cent in 2018-19. Net FDI inflows grew by 14.2 per cent in 2018-19. Capital expenditure of Central Government grew by 15.1 per cent in 2018-19 leading to increase in share of capital expenditure in total expenditure. Given the macroeconomic situation and the structural reforms being undertaken by the government, the economy is projected to grow at 7 per cent in 2019-20.
3. Fiscal Developments: Over the last six years,
budgetary expenditure of the Central Government, as per cent of GDP, has seen
considerable moderation with most of the reduction in the revenue expenditure.
Total expenditure fell by 0.3 percentage points in 2018-19 PA (Provisional
Actuals) over 2017-18, with 0.4 percentage points reduction in revenue
expenditure and 0.1 percentage points increase in capital expenditure. Within
revenue expenditure, major subsidies comprising food, fertiliser and petroleum
continued their downward trend and have further declined by 0.1 percentage
point of GDP in 2018-19 PA over 2017-18. Improving the quality of expenditure
remains the key priority. Meeting allocational requirements without diversion
from the newly revised fiscal glide path remains the foremost challenge.
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4. Monetary policy development: Monetary policy witnessed a u-turn over the last year. The benchmark policy rate was first hiked by 50 bps and later reduced by 75 bps due to weaker-than anticipated inflation, growth slowdown and softer international monetary conditions. Liquidity conditions, however, have remained systematically tight since September 2018. The performance of the banking system has improved as NPA ratios declined and credit growth accelerated. However, financial flows to the economy remained constrained because of decline in the amount of equity finance raised from capital markets and stress in the NBFC sector. The ecosystem for insolvency and bankruptcy is getting systematically built out. It has already led to recovery and resolution of significant amount of distressed assets.
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5. Price situation: During FY 19 headline (CPI-C) inflation continued its downward trajectory on the back of low food inflation. Core inflation which was above 6 per cent in the six out of first seven months of FY 19 started moderating November onwards. Services and goods are trending differently. Rural inflation moderated but urban inflation rose in 2018-19 over the previous year. States too witnessed decline in inflation during the year.
6. External
Sector: India’s macroeconomic situation on the external side continues to
be stable. Though the current account deficit is projected at 2.4 per cent of
GDP in 2018-19, up from 1.8 per cent in 2017-18, this is within reasonable
levels. The widening of the current account deficit has been driven by a
deterioration of trade deficit from 6.0 per cent of GDP to 6.7 per cent across
the two years.
7. Agriculture: Average annual growth rate in real
terms in agricultural & allied sectors has remained at around 2.88 per cent
during 2014-15 to 2018-19. However, the volatility of output growth as measured
by the coefficient of variation has declined from 2.7 in the period of
1961-1988 to 1.6 during 1989-2004 and further to 0.8 during 2005 to 2018.
8. Industry and
Infrastructure: The industrial growth rate in terms of Index of Industrial
Production (IIP) during 2018-19 stood at 3.6 per cent as compared to 4.4 per
cent growth rate in 2017-18. The moderation in 2018-19 has been mainly due to
subdued manufacturing activities in Q3 and Q4 due to slower credit flow to
medium and small industries, reduced lending by NBFCs owing to liquidity
crunch, tapering of domestic demand for key sectors such as automotive sector,
pharmaceuticals, and machinery and equipment, volatility in international crude
oil prices etc.
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The eight core infrastructure supportive industries have achieved the overall growth rate of 4.3 per cent during 2018-19 similar to the increase achieved in 2017-18.
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9. Service sector: The services
sector accounts for 54 per cent of India’s Gross Value Added (GVA). Its growth
rate moderated to 7.5 per cent in 2018-19 from 8.1 per cent in 2017- 18. The
segments that saw deceleration are tourism, trade, hotels, transport,
communication and services related to broadcasting, public administration and
defence. Financial, real estate and professional services category accelerated.
An important finding is that India’s services sector does not generate jobs in
proportion to its share in GVA. This contrasts with the international
experience.
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