Economic Survey-2018

Economic Survey

• The Economic Survey projects the official version of the state of the economy and is presented in Parliament before the presentation of the annual Budget.
• It discusses the outlook, prospects and challenges of the economy while recommending reform measures that are essential to propel the economy.
• 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.
• The Department of EconomicAffairs, Finance Ministry of India presents the Economic Survey in the parliament every year. It is prepared under the guidance of the Chief Economic Adviser, Finance Ministry.
• The Survey’s aim is to build a portfolio of contributions, combining description, new data creation, deep-dive research and provocative policy ideation.

Introduction: Economic Survey, 2018

• The Economic Survey, 2018 was tabled in Parliament by Finance Minister Arun Jaitley.
• The Economic Survey 2018 has estimated that the Indian economy will grow by 7-7.5% in 2018-19, thereby re-instating India as the world’s fastest-growing major economy.
• The survey has been brought out in two volumes:

1. Volume 1: It contains the analytical overview and more research-cum-analytical material.

• A large part of Volume 1 focuses on more long-term challenges.
• In addition to the overview and chapters of contemporary relevance such as the GST, the investment-saving slowdown, and fiscal federalism and accountability, there are five chapters devoted to challenges of long-term economic convergence, gender inequality, climate change and agriculture, delays in the appeals and judicial process, and science and technology.

2. Volume 2: It provides the more descriptive review of the current fiscal year, encompassing all the major sectors of the economy.

 

What’s new in Survey?

A Survey in pink

• As a symbol of support for the growing global movement to end violence against women, the Economic Survey for 2017-18 has a pink-coloured cover.
• The survey points to addressing the deep societal meta-preference in favour of sons, and empowering women with education and reproductive and economic agency as critical challenges for the Indian economy.

 State Exports

• Incorporating data on international exports of states for the first time, the Economic Survey underscores the direct co-relation between export performance of states and how rich they are.
• The Survey pointed out five states that accounted for 70 per cent of India’s exports are:

1. Maharashtra
2. Gujarat
3. Karnataka
4. Tamil Nadu
5. Telangana

Bollywood Reference

• The Economic Survey cited Bollywood’s iconic dialogue ‘tarikh-par-tarikh’ (dates after dates) to highlight the frequent delays in the judicial process.
• It called for coordinated action between government and the judiciary to address the delays and boost economic activity.
• The Survey also begins the chapter about climate change and agriculture with a line from the song of Manoj Kumar-starrer Upkaar – Mere desh ki dharti sona ugle ugle heerey moti (My country’s soil where crops grow like gold, diamonds, and pearls).

Economic Survey Highlights

 

1. Increase in taxation base:

• Demonetisation and implementation of Goods and Services Tax (GST) have resulted in “a substantial increase” in the number of new taxpayers in the country.
• GST impact 

• The taxpayers under the new GST regime have increased by 50 per cent or 3.4 million.
• States of Maharashtra, Uttar Pradesh, Tamil Nadu and Gujarat have seen the highest number of GST registrants.
• Under the GST regime, Maharashtra accounts for 16 per cent of the GST base, followed by Tamil Nadu with 10 per cent, Karnataka at 9 per cent, Uttar Pradesh at 7 per cent and Gujarat at 6 per cent.
• Demonetisation impact 
• Taxpayers under the new tax regime have increased by 50 per cent; 18 lakh new I-T filers since Nov 2016, the month of demonetisation announcement.
• For the rise in individual income taxpayers since demonetisation, the Survey said the average income of new filers was close to the income tax threshold of Rs 2.5 lakh, limiting the early revenue impact.
• But “the revenue dividends should increase robustly”, as income growth over time pushes many of the new tax filers over the threshold.

 

2. Direct Tax and Fiscal federalism:

• Low contribution of Direct tax: 
• Though direct taxes account for about 70 per cent of total taxes in Europe, in India the figure is around 35 per cent. 
• Also unlike in other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the GST proves to be a buoyant source of revenue.
• Collection by States: The Survey said that in India the states generate very low share of about 6 per cent of their revenue from direct taxes while the figure is 19 per cent in Brazil and 44 per cent in Germany. 
• Collection by rural local governments (RLGs): 
• Rural local governments in India generate only 6 per cent of revenues from own resources compared to 40 per cent in Brazil and Germany. 
• Panchayats received rest amount i.e. about 94 per cent of their revenues from the devolved funds from the Centre/State.
• Low levels of tax collections by the local governments in rural areas are posing a challenge in reconciling fiscal federalism and accountability.
• Collection by urban local governments (ULGs):
• Urban local governments in India are much closer to international norms, collecting 18 per cent of total revenues from direct taxes compared to 19 per cent in Brazil and 26 per cent in Germany. 
• Further, urban local governments in India generate 44 per cent of their total revenue from own sources.

 

3. Formal and informal sector:

• Formal employment can be defined in at least two senses. First, when employers are providing some kind of social security to their employees. Second, when firms are part of the tax net.
• Defined by social security:
• The Survey stated that formality defined in terms of social security provisions like EPFO/ESIC, 'formal sector non-farm payroll' is estimated at about 7.5 Crore, or 31 per cent of the non-agricultural workforce (24 Crore).
• This estimate includes government non-farm payroll (center and states), which is roughly estimated at 1.5 Crore (excluding defence personnel). 
• Defined by tax net:
• While on being defined in terms of being part of the GST net i.e. combined numbers from EPFO and ESIC with GST data, the 'formal sector non-farm payroll' share has been found to be 53 per cent or 12.7 Crore of the non-agricultural workforce. 

Formal-Informal sector - Distribution of firms:

• Within both, the tax and social security net: Only about 0.6 percent of firms, which account for 38 per cent of total turnover, 87 per cent of exports, and 63 per cent of GST liability are in the “hard core” formal sector in the sense of being both in the tax and social security net. 
• Within tax but outside Social security net: Around 12 percent of firms, accounting for 41 percent of turnover, 13 percent of exports, and 37 percent of tax liabilities are in the tax net but not the social security net. 
• Outside tax but within social security net: Less than 0.1 percent of firms accounting for about 14 percent of turnover are in the social security net but not in the GST net, consisting of mostly firms that are in GST-exempt sectors such as education, health, electricity, the Survey said.
• Outside both, the tax and social security nets: 87 percent of firms, representing 21 per cent of total turnover, are purely informal, outside both the tax and social security nets.

 

4. Detrimental to growth - Investment slowdown or saving slowdown?

• Decline in both:
• The Survey said the increase in India’s savings and investment rate was unusual in the last decade, in contrast to the prolonged decline from the peak level.
• The ratio of gross fixed capital formation to Gross Domestic Product or GDP climbed from 26.5 percent in 2003, reached a peak of 35.6 percent in 2007, and then slid back to 26.4 percent in 2017. 
• The ratio of domestic saving to GDP has registered a similar evolution, rising from 29.2 percent in 2003 to a peak of 38.3 percent in 2007, before falling back to 29 percent in 2016.

• Reasons for decline:
• Fall in investment is mainly due to the decline in private investment. 
• Based on the break-up of investment and saving, that is available up to 2015-16, private investment accounts for 5 percentage points out of the 6.3 percentage point overall investment decline over 2007-08 and 2015-16.
• The fall in saving, by about 8 percentage points over the same period, has been driven almost equally by a fall in household and public saving. 
• The fall in household saving has in turn been driven by a fall in physical saving, partly offset by an increase in the holding of financial assets.

• Investment slowdowns are more detrimental: 
• Arguing that investment slowdowns are more detrimental to growth than saving slowdowns. 
• A one percentage point fall in investment rate is expected to dent growth by 0.4-0.7 percentage points.
• No reversal in investment slowdown: 
• The Survey notes that India’s investment slowdown, which is in the works for past eight years, is not over yet and its reversal is key for the country to come back to 8-10 per cent growth trajectory. 
• Notably, mean reversion or some degree of automatic bounce-back is absent so that the deeper the slowdown, the slower and shallower the recovery.
• Why no reversal?
• India’s investment decline seems particularly difficult to reverse, partly because it stems from balance sheet stress and partly because it has been usually large.
• What need to be done?
• But some countries in similar circumstances have had fairly strong recoveries, suggesting that policy action can decisively improve the outlook.
• Policy priorities over the short-run must focus on reviving investment. 
• Mobilizing saving, for example via attempts to unearth black money and encouraging the conversion of gold into financial saving or even courting foreign saving are important but perhaps not as urgent as reviving investment.

5. India's growth story- Fall from sweet spot:

• In Economic Survey 2014-15, it was argued that India has reached a sweet spot and can be launched on to a double-digit growth trajectory in the medium term. 
• However in the current Survey, there is fall from expected double-digit growth to 6.50 per cent for the current year as per the Central Statistics Office (CSO) estimates.
• What are reasons for fall?
• The overhang and the drag of twin balance sheet: The twin balance sheet was exerting a bigger drag than expected. 
• Other four reasons: demonetisation, GST, high interest rates, oil prices.
• High interest rate: Interest rates are now also slightly lower than where they were. That’s why we expect that we can go back to our growth rate of double digit.

• Reason for increase in crude oil price: As per last year's economic survey, oil will not go above $55, at most $60 (per barrel). But it has been proven wrong and there are two things that have contributed to that. 
• Shale oil price: One of course is that it was thought shale oil will come back at about $50-55, so far it has not come back to the same extent. The shale producers now want (a certain amount of) profit margins than just expanding activity, so the response has been less responsive and less quick. 
• Geo-politics: Second, which is completely unforeseeable thing is what is happening in Saudi Arabia. 

6. NPA and Road sector:

• Economic survey analysis:
• Increase in NPAs: Between 2012-13 and 2017-18, the total credit pumped into the road sector grew by 41 per cent to Rs 1,80,277 crore. During the same period, however, the share of NPAs in them grew from 1.9 per cent to 20.3 per cent. 
• Delayed projects: Analysing the sector, the survey points out that out of the 482 ongoing projects in road transport and highways, 43 projects face cost overruns and 74 projects are behind schedule. The total bouquet of the 482 projects is worth Rs 3,17,373.9 crore.
• Reason for delay in projects: Projects are delayed mainly due to problems in land acquisition, utility shifting, poor performance of contractors, environment/ forest/wildlife clearances, Road Over Bridge (ROB) and Road Under Bridge (RUB) issue with Railways, public agitations for additional facilities, and arbitration/contractual disputes with contractors etc..
• Ministry's statement:
• Road Transport and Highways ministry officials said the figure of NPAs could be out of context because road projects typically have long gestation periods. 
• Moreover, they said all projects have been revived and new life has been infused into historically languishing projects.
• The inputs on NPAs, ministry sources said, did not go from the ministry but were taken from RBI data and reflected money borrowed by concessionaires for the road projects. 
• New initiative : 
• New PPP model: Ministry has taken initiatives to revive the highways constructions sector since 2014 through various innovative financing models, including the Hybrid Annuity Mode (HAM), to add renewed viability in the projects. 
• Policy interventions: With proactive policy interventions, around 88 per cent of delayed projects have now been put back on track, or appropriately re-engineered and restructured and the total number of stalled projects have been reduced to three.
• Fresh capital from market: Financing routes like monetisation of projects through the Toll-Operate in Transfer model, securitisation of toll revenue, adopting the ‘Infrastructure Investment Trusts route, other innovative financing options including LIC, Long Term Pension Funds etc., have been taken to attract fresh capital from the market on the strength of already operational projects.

7. Agriculture

• The Economic Survey stated that losses to farmers’ income due to climate change could be as steep as 20-25 per cent in unirrigated areas.
• The current levels of farm income translate into more than Rs 3,600 per year for the medium farm household.
• It noted that the government’s goal of doubling farmers’ incomes increasingly runs up against the current realities of Indian agriculture and the harsher prospects of its vulnerability to long term climate change.
• The survey pointed out that the last few seasons have witnessed plenty of problems which include:

1. Shortages of water and land
2. Deterioration in soil quality
3. Climate change-induced temperature increases and rainfall variability.

• The survey pointed out that while taking into consideration the agricultural policy reforms in India, distinction must be made between two agricultures in India:

1. An agriculture whixh is well-irrigated, input-addled and price-and-procurement-supported cereals grown in Northern India. Here the challenge is for policy to change the form of the support from prices and subsidies to less damaging support in the form of direct benefit transfers.
2. Another agriculture- non-cereals in central, western and southern India- where the problems are:
3. Inadequate irrigation
4. Continued rain dependence

• Ineffective procurement

1. Insufficient investments in research and technology for non-cereals such as pulses, soyabeans, and cotton
2. High market barriers
3. Weak post-harvest infrastructure for fruits and vegetables

• Challenging non-economic policy (livestock)

Suggestions

• As agriculture is a state subject, the Survey strongly advocated a mechanism similar to the GST Council to bring more reforms in the agriculture sector and boost farmers’ income.
• The survey suggested improvement in irrigation, use of new technologies and better targeting of power and fertiliser subsidies.
• The Survey called for an effective crop insurance and embraces farm science and technology with renewed ardour.
• It also said that power subsidy needs to be replaced by direct benefits transfer so that power use can be fully costed and water conservation furthered.

Irrigation scenario

• At present, about 45 per cent of farm land is under irrigation.
• The Indo-Gangetic plain and parts of Gujarat and Madhya Pradesh are well irrigated.
• The survey noted that the parts of Karnataka, Maharashtra, Madhya Pradesh, Rajasthan, Chattisgarh and Jharkhand are still extremely vulnerable to climate change on account of not being well irrigated.
• The challenge is that the spread of irrigation will have to occur against a backdrop of extreme groundwater depletion, especially in North India.
• It stated that technologies such as drip irrigation, sprinklers and water management may hold the key to future Indian agriculture.

Gender-specific interventions

• With more women entering the agriculture sector due to growing migration of men from rural to urban areas, the Economic Survey 2017-18 called for gender-specific interventions to support them.
• The Survey called for an ‘inclusive transformative agricultural policy’ that should aim at gender-specific interventions to raise productivity of small farm holdings, integrate women as active agents in rural transformation and engage men and women in extension services with gender expertise.
• The women farmers should have enhanced access to resources like land, water, credit, technology and training which warrants critical analysis in the context of India.
• In addition, the entitlements of women farmers will be the key to improve agriculture productivity.
• The differential access of women to resources like land, credit, water, seeds and markets needs to be addressed.
• For sustainable development of the agriculture and rural economy, the contribution of women to agriculture and food production cannot be ignored.