Little Bang: Economic Survey 2015 takes a realistic view on reforms

The Economic Survey has transcended the earlier objective of being a statistical presentation of the state of economy to a proposed policy and strategy document over the years. In between it reads like a research paper with several graphs and equations thrown in which will excite the academic and possibly confuse the layman. The ideology of the Department of Economic Affairs comes into focus here as the report talks a lot of the way forward given the problems that we have and makes some suggestions. The decision to implement will be with the government and the required ministry would have to take charge.

As far as the data sets are concerned, almost everything presented has been issued by the concerned ministries earlier and hence there is really no new information to be taken from these documents. There is a projection of GDP growth for next year at 8.1-8.5 percent which looks fairly reasonable considering that almost all sectors in the economy have tended to perform better in 2014-15 (FY15) compared with FY14, which gives us reason to believe that FY16 will be better. The Survey also goes a few steps ahead and avers that we could soon be reaching the double-digit growth level. While this may sound a bit pompous given that the ground reality today is not as sanguine as the GDP growth numbers suggest, statistically achieving this mark should not be an issue if we play our cards well.

On a cautious note, the Survey also projects an inflation rate of 5-5.5 percent for FY16 even though it does talk about oil prices remaining within range and global conditions keeping commodity prices depressed during this year. One senses that there is an acceptance that our kind of an economy will be living with such an inflation rate and going to a range of 2-4 percent may not really be sustainable. It links this number to the declining growth in wages, which it says is good for inflation as demand comes down. However, intuitively, lower growth in wages also means that demand for consumer goods gets affected, which will impact overall industrial growth and finally GDP. Therefore, lower wages may not quite be the right remedy for us.

The interesting part of the Survey is the set of chapters which highlight the ideology. While some of them are known, there are some refreshing elements.

First, the Survey rightly points out that in a democratic setting like ours big bang reforms are not always possible. This is a practical line which is supported by the arguments that we have multiple actors and institutions which have to be taken along, given the political dynamics, is not easy. Taking states along is a challenge and while it is easy for us to talk of GST, the states have not had a good experience with Central sales tax. To this the Survey adds that entities like CAG and the Supreme Court can always come in the way of implementation of policies. But this should not be a reason for lethargy. The logic is compelling.

Second, the Survey stresses the importance of investment and backs two paths. The first is the PPP framework where it feels this is the way forward. We need to rework our models and ensure it becomes impactful as the private sector’s role is important; and it should be brought back to our development model. The second is the role of public investment, which is taken to be of paramount significance. While private investment will work in the long run, the government has to step in in the short run and provide the impetus. Here surprisingly, it banks on the railway budget and the investment through this channel to work its way back to the other sectors of the economy.

Third, it talks of getting in a national market for agriculture to improve this sector. Marketing is certainly a critical part of the value chain for farming but this concept is hard given that the mandis have to be linked and most of them do not have the necessary systems in place to enable them, even if they are willing. Besides given the distances involved, farmers should have better connectivity to other centres - which is not there. Hence while the idea is progressive, making it work is a challenge as the first point of contact for the farmer is always the mandi close by. The Survey emphasises irrigation but does not talk of productivity and the migration away from agriculture, which are also major problems in this sector.

Fourth, the Survey is gung ho on the new Jan Dhan scheme and the acronym of JAM will be the way forward for inclusion - which includes a Jan Dhan account, an Aadhaar card and mobile services. We would really need to work hard to make this happen as around two-thirds of the Jan Dhan accounts are zero balance ones. These have to be made live accounts and the direct benefit transfers rollout would need to be aggressive to ensure that households get into the habit of using these accounts. The logical step later will be to provide credit, which is probably a more pressing need for the lower income groups.

Fifth, the Survey is concerned on the banking system. It talks a lot of double financial repression at a time when bank assets are stressed. On the assets side it says that SLR and priority sector lending affect banks’ lending ability. While the latter is pertinent, the SLR argument is weak as banks today hold excess SLR of their own volition. It provides comfort when NPAs are rising and they are reluctant to lend to industry.  Lower government borrowing will actually create problems for banks as they will not have avenues to invest their funds. Curiously, this year, when lending was down, banks lowered deposit rates to deter savings so that they did not have to pay higher interest. This in turn leads to the other issue of repression on the liabilities side where deposit holders get a low real return.

We do need to wait and see how these issues are tackled by the government this year through various channels. The Survey is confident that the Fiscal Responsibility and Budget Management (FRBM) path will be maintained - which is good news. Achieving the goals set with this constraint will be a major triumph for the economy.

The author is Chief Economist, CARE Ratings. These views are personal