Economic Survey predicts over 8% growth in 2015-16: Time for big-bang reforms

Just a day ahead of the Union Budget, the NDA-led government today tabled the Economic Survey for 2014-2015 in Parliament which outlines the broad direction of the Budget and the economic performance of the country. The Survey forecasts a growth rate of over 8% for the financial year 2015-2016 on the basis of the new GDP calculation formula and emphasises that there is scope for big bang reforms as of now.

The growth estimates of over 8 percent for the current year is on expectations that the monsoon will be favourable, as it was forecast to be normal, compared to last year and the survey suggests that in the  short run, growth will receive a boost from cumulative impact of reforms, lower oil prices, and likely monetary policy easing.

“The Economic Survey indicates that a clear political mandate for reform and a benign external environment now is expected to propel India on to a double digit trajectory. Indian economy appears to have now gone past the economic slowdown, persistent inflation, elevated fiscal deficit, slackening domestic demand, external account imbalances and oscillating value of the rupee,” the survey said.

It further said that India can increase public investment to drive growth without borrowing more, in an indication that Finance Minister Arun Jaitley will stick to debt targets in his maiden full-year budget on Saturday.

The Survey outlines a medium-term strategy to create buffers for future economic downturns, which are

1. Reduce deficits a. Reduce fiscal deficit over the medium term to the established target of 3% of GDP b. Move towards the golden rule of eliminating the revenue deficit c. Ensure thereby that borrowing over the cycle is only for capital formation 2. Expenditure Control and Expenditure Switching a. Maintain a firm control on expenditures, in order to achieve the above targets b. Improve quality of public expenditure; shift away from public consumption (by reducing subsidies)towards investment

The Survey invokes thegolden rule: Governments are expected to borrow over the cycle only to finance investment, and not to fund current expenditures. Hence Short-term targets should be set accordingly. This, the Survey argues, would assist the Government to take the economy back to a durably higher growth path.

Here are the highlights 1. Supply side there are concerns but 2014-2015 double-digit growth trajectory is now possible. The CSO forecasts FY16 GDP growth between 8.1-8.5 percent. Meanwhile, FY15 GDP growth is seen at 7.4 percent

The Survey says expectation for such a growth rate is due to a number of reforms that have already been undertaken and more that are being planned for. The Survey enlist various reform measures like de-regulation of diesel price, taxing energy products, replacing cooking gas subsidy by direct transfer on national scale, passing an Ordinance to reform the coal sector via auctions, increasing the FDI caps in defence, etc.

2. Economic Survey says overhauling of subsidy regime would pave the way for expenditure rationalisation. Survey further said that India must reverse the trajectory of recent years and move toward the golden rule of eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.

3. Farm output growth, however, is likely to lag behind at 4 percent

4. Government should ensure expenditure control to reduce fiscal deficit. So expenditure control and expenditure switching is key for government to achieve its fiscal deficit target. India must adhere to medium-term fiscal deficit target of 3 percent of the country’s gross domestic product (GDP), the report added.

5. Retail inflation for FY15 is seen between 5 and 5.5 percent. Survey says inflation showing declining trend as a result of government measures and falling international oil prices.

According to the Economic Survey, average Wholesale Price Index (WPI) declined to 3.4% in 2014-15 (April-December) as compared to an average of 6% during 2013-14. The WPI inflation even breached the psychological level of 0% in November, 2014 and January, 2015 thanks to lower food and fuel prices.

The main factors causing moderation in inflation include persistent decline in crude prices and softness in the global prices of edible oils and even coal, while tight monitary policy helped contain demand pressures, creating a buffer against any external shock and keeping volatility in the value of the Rupee under check.

6. Foodgrain production for 2014-15 estimated at 257.07 mn tonnes; to exceed that of last 5 years by 8.5 million tonnes

7. Survey expects FY15 current account deficit at 1.3 percent of GDP. The current account deficit has declined from a peak of 6.7 percent of GDP (in Q3, 2012-13) to an estimated 1 percent in the coming fiscal year.

8.Economic Survey says outlook for external sector is perhaps most favourable since 2008 financial crisis

9. Implementing the Finance Commission recommendations will lead to states accounting for a large share of total tax revenue.

10. The Survey says that a close look at price subsidies, which are estimated to be about 3,78,000 crore rupees, about 4.24 percent of GDP, reveal that they may not be the government’s best weapon for fighting poverty.

“The debate is not about whether but how best to provide support to the poor and vulnerable. The government subsidises a wide variety of goods and services with the aim of making them affordable for the poor, including: rice, wheat, pulses, sugar, railways, kerosene, LPG, naphtha, iron ore, fertiliser, electricity, water.Are these subsidies effectively targeted at the poor? Unfortunately, subsidies can sometimes be regressive and suffer from leakages. For example, electricity subsidies by definition only help electrified households. Even in the case of kerosene, 41 percent of PDS kerosene is lost as leakage and only 46 percent of the remaining 59 percent is consumed by households that are poor,” the survey said.

The direct fiscal cost of these select subsidies is roughly Rs  378,000 crore or 4.2 percent of 2011-12 GDP. This is roughly how much it would cost to raise the expenditure of every household to the level of a 35th percentile household (well above the 21.9percentTendulkar Committee poverty line).

11. Adopting what it called the JAM Number Trinity-Jan Dhan Yojana, Aadhaar and Mobile numbers would allow States to deliver subsidies to poor in a targeted and less distorted manner.

12. The survey says that liquidity conditions (money supply) have remained broadly balanced during 2014-2015 except for some temporary tight conditions due to delayed government expenditure. Steps taken by the RBI played a positive role in managing the liquidity conditions.

13. According to Survey, FY 2014- 2015 saw some stress on the asset quality of banks as there was an increase in gross NPAs. As on June 2014 , five subsectors, viz. Infrastructure, Textiles, Iron & Steel, Mining and aviation hold 54% of total stressed advances of Public Sector Banks.

14. The Survey states that fiscal action cannot wait and that it should continue in the upcoming year as well. It however adds that the need for accelerated fiscal consolidation has reduced, in view of reduced macroeconomic pressures.

15. Survey says that skill development and employment are the major challenged faced by the economy today. Dearth of formal vocational education, lack of variation quality, high school dropout rates, inadequate skill training capacity, negative perception towards skilling, and lack of industry ready skills even in processional courses are the major cause of poor skill levels of India’s workforce, it said.

The survey has also shown that the cause for concern is the deceleration in the compound annual growth rate of employment during 2004-05 to 2011-12 to 0.5 percent from 2.8 percent during 1999-2000 to 2004-05 as against growth rate of 2.9 percent and 0.4 percent respectively in the labour force for the same periods. In order to improve generation of productive employment under MNREGA, the Intensive and Participatory Planning Exercise has been initiated to prepare the labour budget for financial year 2015-16 in selected 2500 backward blocks using participatory rural appraisal technique.

17. The Economic Survey, however,expressed serious concern that several projects have been stalled. It suggested revitalizing public private partnership model of investment.

The stock of stalled projects stands at about 7 percent of GDP, accounted for mostly by the private sector. Manufacturing and infrastructure account for most of the stalled projects. Changed market conditions and impeded regulatory clearances are the prominent reasons for stalling in private and public sectors, respectively.

18. It also said that  India faces an export challenge, reflected in the fact that the share of manufacturing and services exports in GDP has stagnated in the last five years. The external trading environment is less benign in two ways: partner country growth and their absorption of Indian exports has slowed, and mega-regional trade agreements being negotiated by the major trading nations in Asia and Europe threaten to exclude India and place its exports at a competitive disadvantage.

19: The Banking Challenge:  The banking balance sheet is suffering from ‘double financial repression’. On the liabilities side, high inflation lowered real rates of return on deposits. On the assets side, statutory liquidity ratio (SLR) and priority sector lending (PSL) requirements have depressed returns to bank assets

20. Putting public investment back on track:  Railways over the years have been on a ‘route to nowhere’characterized by underinvestment resulting in lack of capacity addition and network congestion and consequent financial weakness.

Very modest hikes in passenger tariffs and cross-subsidisation of passenger services from freight operations over the years have meant that Indian (PPP-adjusted) freight rates remain among the highest in the world, with the railways ceding significant share in freight traffic to roads (that is typically more costly and energy inefficient). As a result, the competitivenessof Indian industry has been undermined. Calculations reveal that China carries about thrice as much coal freight per hour vis-à-vis India. Coal is transported in India at more than twice the cost vis-à-vis China, and it takes 1.3 times longer to do so. However, in the long run, the railways must be commercially viable and public support must be linked to railway reforms: adoption of commercial practices; tariff rationalization; and technology overhaul.