The pre-Budget Economic Survey 2018-19 on Thursday estimated the economy to grow at 7 per cent in 2019-20 and has called for shifting gears to realise an 8 per cent growth in the coming year which it cautioned will pose several challenges on the fiscal front.
The first survey of the new government and the first to be tabled in Parliament by Finance Minister Nirmala Sitharaman today said the 7 per cent growth for the current fiscal 2019-20 has been estimated on the back of anticipated pickup in the growth of investment and acceleration in the growth of consumption.
The survey, presented ahead of the full Budget on Friday, said the huge political mandate for the government augurs well for the high economic growth.
It said India continued to remain the fastest growing major economy in the world in 2018-19 despite a slight moderation in GDP growth from 7.2 per cent in 2017-18 to 6.8 per cent in 2018-19.
The two-volume survey India's growth of real GDP has been high with average growth of 7.5 per cent in the last five years. The 6.8 per cent growth in 2018-19 was some moderation in growth when compared to the previous year.
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This was mainly due to lower growth in agriculature and allied, trade, hotel, transport, storage and services related to broadcasting and public administration and defence sectors on the external front, the current account deficit increased from 1.9 per cent of GDP in 2017-18 to 2.6 per cent in April to December 2018.
The widening of the CAD was largely on account of a higher trade deficit driven by rise in crude oil prices (Indian basket).
In the 'outlook' for the Indian economy in chapter relating to fiscal developments, the survey said the coming year will pose several challenges on the fiscal front.
It said the financial year 2018-19 has ended with shortfall in GST collections.
"Therefore, revenue buoyancy of GST will be key to improved resource position of both Central and State Governments." it said.
Thirdly, the survey points out that resources for now expanded Pradhan Mantri Kisan Sanman Nidhi (PM-KISAN) and Ayushman Bharat, as well as new initiatives of the new Government, will have to be found without compromising the fiscal deficit target as per the revised glide path.
Fourthly, the US sanctions on oil import from Iran is likely to have impact on oil prices and thereby on the petroleum subsidy, apart from implications for current account balances.
Finally, the survey said the Fifteenth Finance Commission will submit its report for the next five years beginning April, 2020. Its recommendation, especiallty on tax devolution, will have implications for Cemtral Government finances, it said.
On tax revenue, the survey said Direct Taxes have grown by 13.4 per cent owing to improved performance of corporate tax. However, indirect taxes have fallen short orf budget estimates by about 16 per cent. This is largely owing to the shortfall in GST revenues. The GST collections are yet to stabilise and several changes have been carried out following decisons of the GST Council during the course of the year.
These changes, among other things, relate to rate rationalisation for goods and services. changes in the threshold limits and exemptions granted.
Though there has been improvement in tax to GDP ratio over the last six years, Gross Tax Revenue (GTR) as a proportion of GDP has declined by 0.3 percentage points in 1018-19 provisional actuals over 2017-18.
Indirect taxes have fallen by 0.4 percentage points of GDP primarily due to to shortfall in GST collections.
This has been partly offset by 0.1 per cent points increase in direct taxes. Trends in major taxes in relation to GDP show that receipts from corporate tax have considerably improved in 2018-19 provisional actuals.
"Better tax administration, widening of TDS carried over the years, anti-tax evasion meas8ures and increase in effective tax payers base have contributed to direct tax buoyancy. Widenbing of tax base due to increae in the number of indirect tax fo;ters om tje GST regime has also led to improved tazx buyoancy.
"Going forward, sustaining imporovement in tax collection will depend o the revenue buoyancy of GST," the survey said.
The survey said India needs to shift gears and sustain a real GDP growth rate of 8 per cent for fructifying Prime Minister Narendra Modi's vision of the country becoming a five trillion dollar economy by 2025.
At a briefing later, Chief Economic Adviser K V Subramanian said the survey departs from traditional thinking by viewing the economy as being either in a virtuous or a vicious cycle, and thus never in equilibrium.
Rather than viewing the national priorities of fostering economic growth, demand, exports and job creation as separate problems, the survey views these macroeconomic phenomena as complementary to each other.
"Thus creating the virtuous cycle with investment, especially private investment, as the main driver can enable growth in each of these important macro variables," said the survey.
In an uncertain world, it said, three key elements are necessary: a vision, a strategic blueprint to achieve the vision, and practical tools to recalibrate constantly to the strategic blueprint.
Among these, treating people as humans and not as robots as in classical economics, creating data as a public good, enhancing the legal system for enforcement of contracts, insuring consistency of policy with the blueprint are some tools.
The survey also utilises advances in behavioural economics to address issues of gender equality, a healthy and a beautiful India, savings, tax compliance and credit quality. It recognises the role of social norms in the success of initiatives such as Beti Bacho Beti Padhao, Swacch Bharat Mission and Jan Dhan Yojana to effect behavioural change.
The foreign exchange reserves in nominal terms (including the valuation effects) decreased by US$ 11.6 billion end-March 2019 over end-March 2018. Within the year, foreign exchange reserves were declining until October 2018 due to RBI's intervention to modulate exchange rate volatility. India's foreign exchange reserves continue to be comfortably placed at US $ 422.2 billion, as on 14th June 2019.
Net Foreign Direct Investment (FDI) inflows grew by 14.2 per cent in 2018-19. Among the top sectors attracting FDI equity inflows, services, automobiles and chemicals were the major categories. By and large, FDI inflows have been growing at a high rate since 2015-16. This pick up indicates the improvement in confidence of the foreign investors in the Indian economy.
Indian banking sector has been dealing with twin balance sheet problem, which refers to stressed, corporate and bank balance sheets. The increase in Non-Performing Assets (NPA) of banks led to stress on balance sheets of banks, with the Public Sector Banks (PSBs) taking in more stress.
Consumption has always been a strong and major driver of growth in the economy. Although the share of private consumption in GDP remains high, the pattern of consumption has undergone some changes over time- from essentials to luxuries and from goods to services
Decline in investment rate and fixed investment rate since 2011-12, seems to have bottomed out with some early signs of recovery since 2017-18. Fixed investment growth 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.
The decline in fixed investment until 2016-17 was mainly by the household sector, with fixed investment by public sector and private corporate sector remaining almost at same levels.
Green shoots in the investment activity appear to be taking hold as also seen in the pickup in credit growth to industry. Credit to, both, large and micro, small and medium enterprises has seen pickup in growth. The growth of bank credit to micro, small and medium enterprises was contracting in 2016 and 2017, but has started picking up n 2018.
Credit growth to large industry started declining since March 2016 and entered negative territory by October 2016. It has recovered since early 2017-18 and the momentum has picked up in the second half of 2018.
In year 2011-12, industry sector had the highest investment rate, followed by services, whereas the agriculture sector had investment rate much less than half of that of services. In 2017-18, investment rate in services sector became the highest. Investment rate in agriculture still continues to lag behind and now is half the investment rate in the industry sector.
Simultaneously, there has been a decline in savings rate as well, with the household sector entirely contributing to the decline. Household savings declined from 23.6 % in 2011-12 to 17.2 % in 2017-18.
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