 "No need for extra stimulus, India to hit around 8 pct growth - adviser")
The Economic Survey for 2015-16, released on Friday, highlighted the global headwinds faced by the economy, and called for a "recalibration of expectations" about annual Indian growth - which it said would likely remain between seven and 7.5 per cent in the medium term. It enumerated significant downside risks even to that figure. The Survey also called for the Reserve Bank of India (RBI) to ease liquidity conditions and further cut interest rates.
While praising incremental reforms undertaken by the government, the Survey also highlighted several disappointments, including failure to pass a goods and services tax, underperformance on disinvestment and privatisation, incomplete rationalisation of subsidies and the stressed balance sheets of banks and private companies. It admitted that thus the Indian economy was not achieving its potential, and still under-performing a potential growth rate that it said was between eight and 10 per cent.
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Arguing that India was "a refuge of stability", especially in macroeconomic terms, the Survey nevertheless held the time was "ripe for a review of the medium term fiscal framework", since growth and revenue projections have changed since the Fourteenth Finance Commission. While making arguments both for and against the current path of fiscal consolidation, the Survey seemed to argue overall for a less stringent fiscal consolidation path. (MACROECONOMIC INDICATORS)
The Survey said that the basic reason to stick to the current fiscal consolidation path, which it described as "aggressive" was to decrease or control the ratio of overall government debt to gross domestic product, in addition to maintaining credibility in government assurances. But the Survey went on to say that the Pay Commission award and the need for public investment suggest a more "moderate" fiscal consolidation than currently planned. (INDIA PROFILE: ECONOMY AND BUSINESS)
Overall, it is concerned that fiscal and monetary policy should not add to the deflationary impulses imported from the rest of the world, and thus constrain demand and a revival of high growth. Asserting there is minimal risk of an over-supply of government-backed paper, the Survey claims that higher deficits than projected would not impact interest rates greatly.
The Survey concludes that even a gradual recovery of nominal growth - which, thanks to deflationary pressure has been lower than expected, driving the debt-to-GDP ratio upward - would be sufficient in any case to deal with the debt problem it had cited as the main reason for sticking to the current fiscal consolidation path.
The Survey also predicted that inflation in 2016-17 would be well below the Reserve Bank of India's five per cent target. While this year's fiscal deficit target would be met, the Pay Commission award would make meeting next year's harder - yet the award would not likely lead to a significant increase in inflation. Slack in the private sector labour market and capacity underutilisation in industry mean that higher public sector wages would not be transmitted across the rest of the economy. Continuing moderation in oil prices, a return to normal monsoons, and persistent below-potential output also led to the Survey's conclusion that consumer price inflation would be between 4.5 and five per cent in 2016-17, well within the RBI's target.
The Survey said that the RBI's cuts in policy interest rates were not being passed on to the broader economy not because administered "small savings rates" were high but because the central bank had kept liquidity conditions tight, as signaled by spreads in the money market. The Survey argued for this to be changed. It also said that the RBI had room to further reduce the headline repo rate, given weak nominal growth.
The Economic Survey frequently features the Centre's chief economist's analysis of possible policy directions. Chief Economic Advisor Arvind Subramanian recently took on renowned economist of inequality Thomas Piketty about India's tax-to-GDP ratio. The Survey carries on that conversation, arguing that India does not indeed have low fiscal capacity given its state of economic development. However, once the quality of a country's democracy is introduced into the analysis, it turns out that "about four per cent of citizens who vote pay taxes, while the percentage should be about 23".
The Survey also carries out a Piketty-like analysis of the "top one per cent" and finds that "the fast-growing years of the 2000s were in fact associated with rising inequality at the very top of the income distribution", a change "greater than in the UK and similar to that in the US". Part of the problem is that finance ministers had raised the threshold for paying income tax "too generously"; had they not, tax revenues would have been Rs 31,500 crore greater and tax-GDP ratio would have been 0.32 percentage points higher.
The Survey also examines the problem of "exit" - saying that stressed corporate and bank balance sheets were partly because it was difficult for capital to exit enterprises or investments that had turned unprofitable. As a consequence, India was littered with firms that were too small and unproductive, taking up scarce resources more efficiently allocated elsewhere. In addition to the proposed bankruptcy law, the Survey argues for independent sector regulators and ending resistance to privatisation by sharing the resources freed up with affected employees.
The 2014-15 Economic Survey had introduced the "JAM" acronym - standing for Jan-Dhan, Aadhaar and mobiles - to better target welfare spending. This year's Survey takes the idea further, saying that direct benefit transfers (DBT) in household liquid petroleum gas (LPG) cylinders had worked in reducing leakage - and arguing that because of close central control on spending the fertiliser subsidy should be the next target for such transfers, and that the fertiliser sector was overdue for reform.
In fact, the Survey indirectly argued for larger-scale subsidy reform by quantifying the degree to which subsidies are cornered by the best-off Indians. Adding up tax exemptions and direct subsidies to the well-off, the Survey said that total implicit subsidy to rich individuals - not corporations, but individuals - was in excess of Rs 1 lakh crore.
The Survey also had particularly pointed recommendations about the direction of India's trade policy, saying "introspection is overdue" on issues including its continued support to farmers that are controversial at the World Trade Organization. The Survey concludes India should "resist calls to seek recourse in protectionist measures, especially in relation to items that could undermine the competitiveness of downstream firms". The Centre has recently imposed price controls on the import of steel, which auto firms have protested.
AT A GLANCE
Highlights of the Economic Survey
Recalibration of growth expectations: "If the world economy lurches into crisis or slides into further weakness, India's growth will be affected"
Refuge of stability: "Its (India's) macro-economy is robust; it is likely to be the fastest-growing major economy in 2016"
Cyclical considerations: "Small differences in the degree of fiscal adjustment may not have much impact on interest rates"
Inflation quiescent, but there's the Pay Commission question: "Looming on the horizon is the wage rise recommended by the Pay Commission... would it destabilise prices and inflation? Most likely, it will not"
Twin balance sheet challenge: Resolving the challenge of impaired financial positions of PSBs and some large corporate houses would require 4 'R's: Recognition, Recapitalisation, Resolution & Reform
Bounties for the well-off: Various schemes and policies provide about Rs 1 lakh crore bounty to the well-off
