Economic Survey: India can leapfrog on growth in services sector, not manufacturing

The Economic Survey, as the name suggests, is a document which gives an update on the state of the economy. The data provided is normally something we are all conversant with as it collates the latest information on every sector and presents the same in a comprehensive form. There are some projections made by the Survey which relates to GDP and finally there are suggestions made on various aspects of the economy. The present Survey is not very different in scope but takes a lot of trouble to highlight some of the major achievements of the policies that have been implemented in the last year. As may be expected, it does not directly point out the weaknesses in the economy or areas where the policy may have created disruption and uses a plethora of data to prove its point.

First, on growth projections, the Survey looks at a higher number than the Central Statistics Office (CSO) for FY18 which is 6.75 percent against 6.5 percent by the latter. It is curious that the CSO number when revealed is rarely supported by official estimates and is always considered to be an understatement. This could be because the CSO tends to be conservative as it extrapolates current data into the future. While the Survey too must be doing a similar exercise, the results are higher.

Further, the forecast for the next year is 7-7.5 percent which is still a wide range against a background of 6.75 percent for FY18 as the lower limit would be a marginal recovery, while the upper one a faster one. The interesting part is that the Survey expects growth to be driven by the industrial sector which would imply that first consumption has to accelerate and investment pick up. The latter will be a challenge given the surplus capacity in industry and the fact that the debt resolution process is still in progress. While 7.5 percent looks achievable it is more likely to be services-driven for at least two more years before investment revives.

File photo of Arvind Subramanian. Image courtesy: PIB

File photo of Arvind Subramanian. Image courtesy: PIB

The Survey also recommends that the Budget should be pragmatic and not aim for extreme fiscal targets meaning thereby that the fiscal deficit target should not be a number which cannot be achieved. It hence signals that there are pressures that have to be addressed such as oil prices (do we increase subsidies or cut taxes to ensure it is less inflationary), a pre-election year, indirect tax collections, non-tax revenue, non-debt capital receipts etc. While the Survey’s suggestion is not binding, this may give a clue that the fiscal deficit target for FY19 will not be 3 percent, but something higher.

The Survey has focused a lot on the achievements of the policy and hence can be considered to be more of an ‘impact Survey’. The starting point is the GST where it has been revealed that there has been 50 percent increase in the voluntary registrations with the number of payers now being 9.8 million, up from 3.4 million. This is a major achievement as the idea of a GST was to ensure that everyone who had to pay tax would comply. By bringing in the tax credit clause, companies have started dealing with the suppliers who have such a registration. Hence, this has been a major victory for the GST.

Related to the GST, the Survey has also assured us that the fear of producer states suffering on account of GST has been allayed and that there has been no loss to any state on account of this tax system. This is good news for the state finances where there was apprehension that there could be shortfalls especially after the two rounds of rate revisions. This implicitly means that the growth in collections would be good at the end of the year.

The second major policy victory has been the IBC where the Survey hails the government for ushering in this reform which will go a long way in addressing the so called twin balance sheet problem of the system. However, we still need to see the final resolution of the big cases before banks start lending for the big infra projects.

The third scoring point which has resulted in better investment climate is the ease of doing business environment. Here the plethora of measures taken by the government has helped to push up our rank in the hierarchy which has set the tone for higher investment in future when demand conditions improve. Related to this measure are the reforms relating to FDI which has increased the inflows leading to a substantial increase in the forex reserves notwithstanding the fact that the trade deficit has been widening.

But there are areas where one could differ with the report. The Survey believes that inflation is under control while the ground reality is something else. The market expects inflation rate to only keep rising as the full impact of the HRA impact, food prices and fuel prices gets embedded in the CPI inflation number. In fact, the increase in MSPs which has been interpreted as a price cooling tool (where it is assumed production increases in the next season), while the market interprets the same as a cause of inflation.

The Survey makes some sharp recommendations for the coming year, which are already under consideration, but have to be taken up with alacrity to ensure that the respective sectors remain robust. The first is the sale of unviable banks and the second is the sale of Air India. These are hard decisions which are on the anvil where one could expect action.

Further, the Survey also considers investment to be more important than savings for growth, the assumption being that foreign capital can substitute the sourcing of funds. This may not be the best thing for the economy where we rely on foreign sources at a time when there could be a sharp slowdown in inflows due to the reversal of interest rates movements in developed countries.

An issue which has been avoided directly by the Survey is the impact of demonetisation, while a lot has been written on the success of GST, the impact of this bold measure has been skipped in terms of effect on GDP and employment. Proxy Data has been provided to show that employment has been on the rise which is contrary to general perception. As the Survey generally takes an independent view of economic data and policy, it would have been interesting to have these numbers in the document.

While the Survey is definitely very interesting, it does not give any clue on what would be the content of the Budget which would be in the domain of the FM directly. One has to wait for the 1st of February.

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(The writer is Chief Economist of CARE Ratings agency)


Updated Date: Jan 29, 2018 16:04 PM

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