Economic Survey 2015: Highlights and Implications

Economic Survey 2015: Highlights and Implications

Q.” The Economic Survey 2015 has far reaching implications for the Indian economy” Discuss in the context of the recommendations of the survey.

First economic survey launched by Chief Economic Adviser Arvind Subramaniam

Highlights

• Economic Survey is optimistic on the economy and its medium term prospects
• Emphasis on fiscal discipline, public investment and quality of expenditure
• Thrust is on key governmental schemes for ensuring subsidies reach the needy

• New data series under scrutiny as India not yet a “tiger” economy: India currently a recovering economy

• Positive impact of government mandate and external environment on CAD/current account deficit

• Railway’s is a “growth” locomotive as per the survey

• Economic Survey stresses double-digit growth trajectory

• Growth aimed at “Wiping Every Tear From Every Eye” and working towards Indian youth’s aspirations

• Survey stresses on Big Bang reforms

Recommendations

Survey strategies

• Improving the investment climate and cutting down on backlog of projects which have been stalled

• Public investment revival within the short term for being the engine of growth in infrastructure sector

• No trade-off between public investment and private investment; one complements the other and crowds it in

• Creative solutions needed for strengthening institutions pertaining to bankruptcy; exit options are available

• Focus on ameliorating over-indebtedness lowering the capacity for new investment generation

• Establishment of high-powered Independent Renegotiation Committee

Survey Recommendations

Indian economy has recovered from:
• Economic slowdown
• Constant inflation
• Heightened fiscal deficit
• Lowered domestic demand
• External account imbalances
• Shifting value of rupee

• Economic Survey has taken change of base year by CSO into account for National Account series from 2004-2005 to 2011-2012

• Growth at market prices for 2015-2016 is expected to be pegged at 8.1 to 8.5 percent

• Growth rate in GDP at constant market prices was 5.1% in 2012-2013 and it rose to 6.9% in 2013-2014; it is expected to hit 7.4% in 2014-2015 as per advanced estimates

• Change in CSO methodology has put forth the concept of Cross Value Added/GVA at the aggregate and sectoral levels

Expectation for growth rate due to ongoing and planned reforms such as:
• De-regulation of diesel price
• Taxing of energy products
• Replacement of cooking gas by direct transfer on national scale
• Passage of Ordinance to reform the coal sector through auctions
• Increase in FDI caps in defence, insurance etc

• Survey has commended changes brought as a result of revenue sharing between states recommended by the 14th Finance Commission

• Survey has indicated India is an attractive investment destination (decline in inflation by 6 percentage points, reduction in CAD from peak of 6.7% to 1% in the coming fiscal)

• Growth in 2014-2015 driven largely by domestic demand; hardly any external support to growth in the year

• Growth in exports is to be projected at 0.9% and growth rate of imports is around -0.5%; Deceleration in imports owing to sharp fall in global oil prices within the current year compressing the oil import bill

• Decline in rate of gross domestic savings from 33.9% of the GDP in 2011-2012 to 31.8% in 2012-2013 and further 30.6% in 2013-2014, aggravated by steep decline in household physical savings rates

• Investment rate as measured by GCF or Gross Capital Formation as percentage of GDP fell from 38.2% in 2011-2012 to 32.3% in 2013-2014

• Private investment the key boost for long term growth

• Public investment, especially the railways to play a vital role in the interim at least

• Revival of growth and deepening of physical connectivity on the cards

• Golden Rule of Fiscal Policy: Governments can borrow over the cycle to fund investment and not current expenditures

• Government has to aim at bring fiscal deficit down to 3% of GDP
• Price subsidies have not exerted transformative effect on living standards; subsidies at 3,78,000 crore and 4.24% of the GDP may not be the perfect way for combating poverty

• Survey indicates price subsidies are regressive; rich households benefit more from subsidy than poor households
• Food Subsidy Bill is pegged at 107823.75 crore rupees in 2014-2015 which aims at increase of 20% over last year
• 41% subsidy is provided for PDS kerosene is missed out on as leakage and currently 46% of the remaining 59% consumed by poor households

• JAM Number Trinity Solution: Combination of Jan Dhan Yojana, Aadhaar and Mobile numbers will allow subsidies to poor persons in a more focussed and less limited manner

• Survey suggested revitalisation of PPP model of investment

• “Skilling India” as important as “Make in India”

• Creation of a National Common Market through a constitutional provision for regulating trading in certain agricultural commodities

• 14th Finance Commission recommendations to be accepted alongside Niti Aayog will take vision of cooperative and competitive federalism further


Implications for the Economy

Fiscal Deficit Targets

• Expenditure must be controlled via subsidy reduction
• Quality of expenditure will improve through spending more on investment and less in consumption
• Importance of meeting medium term fiscal deficit target of 3% of GDP
• GoI will adhere to fiscal deficit target of 4.1% of GDP in 2014-2015
• Expenditure control to reduce fiscal deficit

Growth Concerns

• 2015-2016 GDP growth pegged at over 8% yearly
• Stress on rapid growth
• New GDP calculation formula
• Stalled projects at 7% of GDP, chiefly in private sector

Reform Issues: Indian can hit borrowing targets and still attain public investments

Inflation Pointers

• Inflation displays a declining trend in 2014-2015
• Lower inflation increases scope for more monetary policy easing
• Government and apex bank must reach monetary framework pact for consolidation of gains in inflation control
• Consumer inflation targeted at 5 to 5.5% in 2015-2016

Fiscal Consolidation

• Government’s commitment to fiscal consolidation stressed on
• Need for balance between public investment and fiscal discipline
• Outlook for external financing favourable

Subsidies and Liquidity

• Revamping the subsidy regimen will lead the way for expenditure rationalisation
• Liquidity conditions to remain manageable in 2015-2016