(All information in this
post reproduced from the Economic Survey 2016-17)
Thought for the day
"Which form of proverb do you prefer Better late than never,
or Better never than late?"
—Lewis Carroll (English, 1832-1898)
Word for the day
Equivoque (n)
An equivocal term;
An ambiguous expression.
A play on words; pun.
Malice towards none
When you get a warning about a potential disaster and you
prepare earnestly to face it; such calamities usually do not occur.
Most tragedies come unannounced.
Govt realizing many new things that we knew all the while
The economic Survey for the current year 2016-17 first time uses
Big Data to analyze the flow of goods (by analyzing transaction level data
provided by using GST Network) and flow of people using the reservation date
provided by Indian Railways. It also uses a new methodology to analyze the
Census data.
It's truly heartening to note that we can expect the policy
narrative to come closer to the reality in next few years. This is a huge
positive.
Eight
interesting discoveries using Big Data analytics!
1. Estimates based on railway traffic reveal
annual work-related migration of about 9mn people, almost double what the 2011
Census suggests.
2. Global rating agencies have poor rating
standards. China’s credit rating was upgraded from A+ to AA- in 2010 while
India’s has remained unchanged at BBB-. From 2009 to 2015, China’s
credit-to-GDP soared from about 142% to 205% and its growth decelerated. The
contrast with India’s indicators is striking.
3. Welfare spending in India suffers from
misallocation. The districts accounting for the poorest 40% receive 29% of the
total funding.
4. India has 7 taxpayers for every 100 voters
ranking us 13th amongst 18 of our democratic G-20 peers.
5. India’s share of working age to non-working
age population will peak later and at a lower level than that for other
countries but last longer. The peak of the growth boost due to the demographic
dividend is fast approaching, with peninsular states peaking soon and the
hinterland states peaking much later.
6. As of 2011, India’s openness - measured as
the ratio of trade in goods and services to GDP has far overtaken China’s. India’s
internal trade to GDP is also comparable to that of other large countries and
very different from the caricature of a barrier-riddled economy
7. Spatial dispersion in income is still rising
in India in the last decade (2004-14), unlike the rest of the world and even
China.
8. Property tax potential remains mostly
unexploited. For example, evidence from satellite data indicates that Bengaluru
and Jaipur collect only between 5% to 20% of their potential property taxes.
GST and Remonetization to guide
policy direction in FY18
It is
heartwarming to see that the state is getting closer to the ground realities
and identifies the problems. The key however still lies in finding sustainable
solutions and earnest implementation of such solutions.
Nonetheless, "Realization" of problem is first
step and the government finally seem to be taking the first step in right
direction.
The current fiscal year is 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.
The GST is aimed at creating 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.
Demonetisation has had short-term costs but holds the potential
for long term benefits. The follow-up actions needed to minimize the costs and
maximise the benefits include:
(a) Fast, demand-driven, remonetisation;
(b) further tax reforms, including bringing land and
real estate into the GST, reducing tax rates and stamp duties; and
(c) acting to allay anxieties about over-zealous
tax administration.
These actions would allow growth to return to trend in 2017-18,
following a temporary decline in 2016-17.
Work-in
progress
The signs of a political dynamic that would banish the ambivalence
toward the private sector and property rights have not been strongly evident
for decades.
This ambivalence is manifested in: the difficulties in advancing
strategic disinvestment; the persistence of the twin balance sheet
problem—over-indebtedness in the corporate and banking sectors—which requires
difficult decisions about burden-sharing and perhaps even forgiving some burden
on the private sector.
The legacy issues of retroactive taxation, which remain mired in
litigation even though the government has made clear its intentions for the
future; agriculture, where the protection of intellectual property rights, for
example in seeds, remains a challenge;
Reform in the civil aviation sector, which has been animated as
much by an interventionist as liberalizing spirit; in the fertilizer sector,
where it is proving easier to rehabilitate unviable plants in the public sector
rather than facilitate the exit of egregiously inefficient ones; frequent
recourse to stock limits and controls on trade in agriculture, which draws upon
the antiquated Essential Commodities Act, and creates uncertainty for farmers.
In each of these examples, there may be valid reasons for the
status quo but overall they indicate that the embrace of markets— even in the
modest sense of avoiding intrusive intervention, protecting property rights,
disposing of unviable public sector assets and exiting from areas of
comparative non advantage, and allowing economic agents to face market
prices—remains a work-in progress.
Global context
The Economic Survey recognizes three external developments as
significant in Indian context.
Outlook
on rates
In the short run, the change in the outlook for global interest
rates as a result of the US elections and the implied change in expectations of
US fiscal and monetary policy will impact on India’s capital flows and exchange
rates.
Markets are factoring in a regime change in advanced countries,
especially US macroeconomic policy, with high expectations of fiscal stimulus
and unwavering exit from unconventional monetary policies. The end of the
20-year bond rally and end to the corset of deflation and deflationary
expectations are within sight.
Rise
in protectionism
The medium-term political outlook for globalisation and in
particular for the world’s “political carrying capacity for globalisation” may
have changed in the wake of recent developments.
In the short run a strong dollar and declining competitiveness
might exacerbate the lure of protectionist policies. These follow on ongoing
trends — documented widely—about stagnant or declining trade at the global
level. This changed outlook will affect India’s export and growth prospects.
China's
monetary policy
Developments in the US, especially the rise of the dollar, will
have implications for China’s currency and currency policy.
If China is able to successfully re-balance its economy, the
spillover effects on India and the rest of the world will be positive.
On, the other hand, further declines in the yuan, even if
dollar-induced, could interact with underlying vulnerabilities to create
disruptions in China that could have negative spillovers for India.
For China, there are at least two difficult balancing acts with
respect to the currency.
Domestically, a declining currency (and credit expansion) prop up
the economy in the short run but delay rebalancing while also adding to the
medium term challenges.
Internationally, allowing the currency to weaken in response to
capital flight risks creating trade frictions but imposing capital controls
discourages FDI and undermines China’s ambitions to establish the yuan as a reserve
currency.
China with its underlying vulnerabilities remains the country to
watch for its potential to unsettle the global economy
Growth slows, inflation moderates, external sector looks up
Real
GDP growth at lower end of estimates
Real GDP growth in the first half of FY17 was 7.2%, lower than the
7.6% rate recorded in the second half of 2015-16.
The main problem was fixed investment, which declined sharply as
stressed balance sheets in the corporate sector continued to take a toll on
firms’ spending plans.
On the positive side, the economy was buoyed by government
consumption, as the 7th Pay Commission salary recommendations were implemented,
and by the long-awaited start of an export recovery as demand in advanced
countries began to accelerate.
The major highlights of the sectoral growth outcome of the first
half of 2016-17 were:
(i) Moderation in industrial and nongovernment
service sectors;
(ii) The modest pick-up in agricultural growth on the
back of improved monsoon; and
(iii) Strong growth in public administration and defence
services
CPI-WPI
converge, core remains stable
Inflation during Fy17 has been characterized by two distinctive
features.
1. The Consumer Price Index (CPI), which
averaged 4.9 per cent during April-December 2016, has displayed a downward
trend since July when it became apparent that kharif agricultural production in
general, and pulses in particular would be bountiful.
2. The reversal of WPI inflation, from a trough
of (-)5.1 percent in August 2015 to 3.4 percent at end-December 2016, on the
back of rising international oil prices.
Core inflation has, however, been more stable, hovering around 4.5
percent to 5 percent for the year so far.
External
position robust
The external position appears robust having successfully weathered
the sizeable redemption of Foreign Currency Non-Resident (FCNR) deposits in
late 2016, and the volatility associated with the US election and
demonetisation.
The current account deficit has declined to reach about 0.3
percent of GDP in the first half of FY2017.
Foreign exchange reserves are at comfortable levels, having have
risen from around US$350 billion at end-January 2016 to US$ 360 billion at
end-December 2016 and are well above standard norms for reserve adequacy.
In part, surging net FDI inflows, which grew from 1.7 percent of
GDP in FY2016 to 3.2 percent of GDP in the second quarter of FY2017, helped the
balance-of-payments.
Fiscal discipline maintained
Trends in the fiscal sector in the first half have been unexceptional
and the central government remains committed to achieving its fiscal deficit
target of 3.5 percent of GDP this year.
Excise
and Service Tax show buoyancy
Excise duties and services taxes have benefitted from the
additional revenue measures introduced last year. The most notable feature has
been the over-performance (even relative to budget estimates) of excise duties
in turn based on buoyant petroleum consumption: real consumption of petroleum
products (petrol) increased by 11.2 percent during April December 2016 compared
to same period in the previous year.
Indirect taxes, especially petroleum excises, have held up even
after demonetisation in part due to the exemption of petroleum products from
its scope.
More broadly, tax collections have held up to a greater extent
than expected possibly because of payment of dues in demonetised notes was
permitted.
Non-tax
revenue face challenges
Non-tax revenues have been challenged owing to shortfall in
spectrum and disinvestment receipts but also to forecast optimism.
The stress in public sector enterprises has also reduced dividend
payments.
State
governments under stress, UDAY weighs
State government finances are under stress. The consolidated
deficit of the states has increased steadily in recent years, rising from 2.5
percent of GDP in 2014-15 to 3.6 percent of GDP in 2015-16, in part because of
the UDAY scheme.
The budgeted numbers suggest there will be an improvement this
year. However, markets are anticipating some slippage, on account of the
expected growth slowdown, reduced revenues from stamp duties, and
implementation of their own Pay Commissions.
For these reasons, the spread on state bonds over government
securities jumped to 75 basis points in the January 2017 auction from 45 basis
points in October 2016.
For the general government as a whole, there is an improvement in
the fiscal deficit with and without UDAY scheme.
Outlook for FY18
Growth
to stay in slow lane
Real GDP growth in FY18 is expected o range between 6.75 - 7.5%.
Exports seen recovering
India’s exports appear to be recovering, 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 IMF’s January update of its World Economic Outlook forecast is
projecting an increase in global growth from 3.1 percent in 2016 to 3.4 percent
in 2017, with a corresponding increase in growth for advanced economies from
1.6 percent to 1.9 percent.
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%.
Private consumption outlook clouded- oil likely a drag, lower
rates plus
The outlook for private consumption is less clear.
International oil prices are expected to be about 10-15 percent
higher in 2017 compared to 2016, which would create a drag of about 0.5
percentage points.
On the other hand, consumption is expected to receive a boost from
two sources: catch-up after the demonetisation-induced reduction in the last
two quarters of 2016-17; and cheaper borrowing costs, which are likely to be
lower in 2017 than 2016 by as much as 75 to 100 basis points.
As a result, spending on housing and consumer durables and
semi-durables could rise smartly.
It is too early to predict prospects for the monsoon in 2017 and
hence agricultural production. But the higher is agricultural growth this year,
the less likely that there would be an extra boost to GDP growth next year.
Private investment unlikely to recover
Since no clear progress is yet visible in tackling the twin
balance sheet problem, private investment is unlikely to recover significantly
from the levels of FY2017.
Some of this weakness could be offset through higher public
investment, but that would depend on the stance of fiscal policy next year,
which has to balance the short-term requirements of an economy recovering from
demonetisation against the medium-term necessity of adhering to fiscal
discipline—and the need to be seen as doing so.
Key
risks to outlook
1. Larger and longer than expected impact of
demonetization.
2. Extraordinary spurt in oil prices due to
geo-political events.
3. Eruption of trade war amongst major countries
Fiscal
outlook
The fiscal outlook for the central government for next year to be
marked by three factors.
1. 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. In fact, excise-related taxes will decline by about 0.1
percentage point of GDP, a swing of about 0.6 percentage points relative to
FY2017.
2. There could be a fiscal windfall both from
the high denomination notes that are not returned to the RBI and from higher tax
collections as a result of increased disclosure under the Pradhan Mantra Garib
Kalyan Yojana (PMGKY). Both of these are likely to be one-off in nature, and in
both cases the magnitudes remains uncertain.
3. The implementation of the GST. It appears that
the GST will probably be implemented later in the fiscal year. The transition
to the GST is so complicated from an administrative and technology perspective
that revenue collection will take some time to reach full potential.
Combined with the
government’s commitment to compensating the states for any shortfall in their
own GST collections (relative to a baseline of 14 percent increase), the
outlook must be cautious with respect to revenue collections.
The fiscal gains from
implementing the GST and demonetisation, while almost certain to occur, will
probably take time to be fully realized.
In addition, muted non-tax revenues and allowances granted under
the 7th Pay Commission could add to pressures on the deficit.
Macroeconomic policy stance for 2017-18
It is clear that an economy recovering from demonetisation will
need policy support.
Monetary
easing desirable
On the assumption that the equilibrium cash-GDP ratio will be
lower than before November 8, the banking system will benefit from a higher
level of deposits. Thus, market interest rates—deposits, lending, and yields on
g-secs—should be lower in 2017-18 than 2016-17. This will provide a boost to
the economy (provided, of course, liquidity is no longer a binding constraint).
A corollary is that policy rates can be lower not necessarily to
lead and nudge market rates but to validate them.
Of course, any sharp uptick in oil prices and those of
agricultural products, would limit the scope for monetary easing.
Fiscal
stimulus - pragmatism needed
Fiscal policy is another potential source of policy support.
Unlike last year, there is more cyclical weakness on account of
demonetisation. Moreover, the government has acquired more credibility because
of posting steady and consistent improvements in the fiscal situation for three
consecutive years, the central government fiscal deficit declining from 4.5
percent of GDP in 2013- 14 to 4.1 percent, 3.9 percent, and 3.5 percent in the
following three years.
But fiscal policy needs to balance the cyclical imperatives with
medium term issues relating to prudence and credibility.
One key question will be the use of the fiscal windfall
(comprising the unreturned cash and additional receipts under the PMGKY) which
is still uncertain. Since the windfall to the public sector is both one off and
a wealth gain not an income gain, it should be deployed to strengthening the
government’s balance sheet rather than being used for government consumption,
especially in the form of programs that create permanent entitlements.
In this light, the best use of the windfall would be to create a
public sector asset reconstruction company so that the twin balance sheet
problem can be addressed, facilitating credit and investment revival; or toward
the compensation fund for the GST that would allow the rates to be lowered and
simplified; or toward debt reduction.
The windfall should not influence decisions about the conduct of
fiscal policy going forward.
Tackling
twin balance sheet problems
Perhaps the most important reforms to boost growth will be
structural. In addition strategic disinvestment, tax reform, subsidy
rationalization — it is imperative to address directly the twin balance sheet
problem. The problem is large, persistent and difficult, will not correct itself
even if growth picks up and interest rates decline.
