EconomicSurvey201415:Changes

Flowofmostsurveysweresomethingsimilartowhatisgivenbelowandwerepublishedassinglevolumedocumentscontaining13or14chapters.

Analysisoflastfinancialyear

Objectivesfornextfinancialyear

Challengesandconcerns

Solutionsthatcanbetaken

Forecaststheeconomicsituationofnextyear

InspiredbytheIMFsWorldEconomicOutlook,201415Surveydepartsstructurallyfromitspredecessorsandpresentsitsoutputintwovolumes.Volume1,theforwardlookingdocumentanalysestheprospectsoftheeconomywhileVolume2,thebackwardlookingdoucmentanalysesthestateofIndianeconomy.FromtheUPSCexamperspective,wefeelVolume2ismoreimportantforPrelims.Volume1canprovideinvaluableanalyseandpointsforMains.

Volume1:Outlook,ProspectsandConcernsForwardLooking

1. EconomicOutlook,ProspectsandPolicyChallenges2. FiscalFramework3. WipingEveryTearFromEveryEye:TheJAMNumberTrinitySolution4. TheInvestmentClimate:StalledProjects,DebtOverhangandTheEquity

Puzzle5. Credit,StructureandDoubleFinancialRepression:ADiagnosisofthe

BankingSector6. PuttingPublicInvestmentonTrack:TheRailRoutetoHigherGrowth7. WhattoMakeinIndia?ManufacturingorServices?8. ANationalMarketforAgriculturalCommoditiesSomeIssuesandWay

Forward9. FromCarbonSubsidytoCarbonTax:IndiasGreenActions

10. TheFourteenthFinanceCommission(FFC)ImplicationsforFiscalFederalisminIndia?

Volume2:RecentDevelopmentsBackwardLooking

1. StateoftheEconomyanoverview2. PublicFinance3. Monetarymanagementandfinancialintermediation4. ExternalSector5. Price,AgricultureandFoodManagement6. Industrial,CorporateandInfrastructurePerformance7. ServicesSector8. ClimateChangeandSustainableDevelopment9. SocialInfrastructure,EmploymentandHumanDevelopment

KeyPointsfromEconomicSurvey

ThebroadthemesoftheSurveyarecreatingopportunityandreducingvulnerability.

AGrowthRateofover8PerCentExpectedfortheComingYear.

ADoubleDigitEconomicGrowthTrajectoryisnowaPossibility.

SuchaGrowthCouldHelpinWipingEveryTearFromEveryEyeandRealizingAspirationofIndiasYouth.

ThereisPoliticalMandateforReformandBenignExternalEnvironmentnow,saystheEconomicSurvey.

ThereisScopeforBigBangReformsnow.

EconomicSurveyhighlightstheneedforbalancebetweenMakeinIndiaandSkillingIndia.

MajorReformInitiativesUndertakenbyGovernmentinBanking,InsuranceandFinancialSector.

WipingEveryTearfromEveryEye:TheJanDhanYojana,Aadhaarand

MobileNumbersProvidetheSolution.

ImprovementinFemaleLiteracyandEducationalChallenges.

SkillDevelopmentandEmploymentaremajorChallenges.

EconomicSurveyRecommendsReformofRailwaysStructure,CommercialPractices,OverhaulofTechnology.

IndianeedstocreateadditionalFiscalSpace.

IndiasNationalSolarMissionBeingScaledupFiveFoldto100,000Megawatts.

InfrastructureGrowthintermsofEightCoreIndustriesHigherthanIndustrialGrowthsince201112.

GovernmentRemainsCommittedtoFiscalConsolidationEconomicSurveysaysEnhancedRevenueGenerationisaPriority.

ExternalSectorisreturningtothepathofstrengthandresilience.

ServicesSectorClocksDoubleDigitGrowth.

HyperGrowthinTechstartupsinIndia,saysEconomicSurveyonServicesSector.

TheFourteenthFinanceCommission(FFC)willenhanceFiscalFederalisminIndia.

GovernmentapprovesaRs.200croreCentralSectorSchemeforimplementingeplatformforagrimarketing.

Revivepublicinvestmenttoimproveinvestmentclimate:EconomicSurvey201415.

CreateNationalCommonMarketinAgriculturalCommodities:EconomicSurvey201415.

IndiasGreenActions:FromCarbonSubsidytoCarbonTax.

FoodSubsidyBillstandsatRs.107823.75croreduring201415(uptoJanuary,2015),showsanincreaseof20%overpreviousyear.

Foodgrainsproductionfor201415estimatedat257.07milliontonneswillexceedaveragefoodgrainproductionoflastfiveyearsby8.5milliontones.

Inflationshowsadecliningtrendduringtheyear201415(April

December).

EconomicSurvey201415Highlights

Thehighlightsfromselectedchapters:

EconomicOutlook,ProspectsandPolicyChallenges

Macroeconomicfundamentalsin201415havedramaticallyimproved.Highlightsare:

1. Inflationhasdeclinedbyover6percentagepointssincelate2013.2. Thecurrentaccountdeficithasdeclinedfromapeakof6.7percentof

GDP(inQ3,201213)toanestimated1.0percentinthecomingfiscalyear.

3. Foreignportfolioflowshavestabilizedtherupee,exertingdownwardpressureonlongterminterestrates,reflectedinyieldson10yeargovernmentsecurities,andcontributedtothesurgeinequityprices.

4. Inresponsetothefavourabletermsoftradeshock(especiallywithregardtooil),macroeconomicpolicyhasappropriatelybalancedgovernmentsavings(twothirds)andprivateconsumption(onethird).

5. Afteranearly12quarterphaseofdeceleration,realGDPhasbeengrowingat7.2percentonaveragesince201314,basedonthenewgrowthestimatesoftheCentralStatisticsOffice.Notwithstandingthenewestimates,thebalanceofevidencesuggeststhatIndiaisarecovering,butnotyetasurging,economy.

Fromacrosscountryperspective,aRationalInvestorRatingsIndex(RIRI)whichcombinesindicatorsofmacrostabilitywithgrowth,illustratesthatIndiaranksamongstthemostattractiveinvestmentdestinations.Itrankswellabovethemeanforitsinvestmentgradecategory(BBB),andalsoabovethemeanfortheinvestmentcategoryaboveit(onthebasisofthenewgrowthestimates).

Severalreformshavebeenundertakenandmoreareontheanvil.The

introductionoftheGSTandexpandingdirectbenefittransferscanbegamechangers.

Structuralshiftsintheinflationaryprocessareunderwayduetoloweroilprices,decelerationinagriculturepricesandwages,anddramaticallyimprovedhouseholdinflationexpectations.Goingforwardinflationislikelytoremaininthe55.5percentrange,creatingspaceforeasingofmonetaryconditions.

Intheshortrun,growthwillreceiveaboostfromthecumulativeimpactofreforms,loweroilprices,likelymonetarypolicyeasingfacilitatedbylowerinflationandimprovedinflationaryexpectations,andforecastsofanormalmonsoonin201516.Usingthenewestimatefor201415asthebase,GDPgrowthatconstantmarketpricesisexpectedtoacceleratetobetween8.1and8.5percentin201516.

MediumtermprospectswillbeconditionedbythebalancesheetsyndromewithIndiancharacteristicsthathasthepotentialtoholdbackrapidincreasesinprivatesectorinvestment.Privateinvestmentmustbetheengineoflongrungrowth.However,thereisacaseforrevivingtargetedpublicinvestmentasanengineofgrowthintheshortruntocomplementandcrowdinprivateinvestment.

Indiacanbalancetheshorttermimperativeofboostingpublicinvestmenttorevitalizegrowthwiththeneedtomaintainfiscaldiscipline.Expenditurecontrol,andexpenditureswitchingfromconsumptiontoinvestment,willbekey.

Theoutlookisfavourableforthecurrentaccountdeficitanditsfinancing.Alikelysurfeit,ratherthanscarcity,offoreigncapitalwillcomplicateexchangeratemanagement.Reconcilingthebenefitsoftheseflowswiththeirimpactonexportsandthecurrentaccountremainsanimportantchallengegoingforward.

Indiafacesanexportchallenge,reflectedinthefactthattheshareof

manufacturingandservicesexportsinGDPhasstagnatedinthelastfiveyears.Theexternaltradingenvironmentislessbenignintwoways:partnercountrygrowthandtheirabsorptionofIndianexportshasslowed,andmegaregionaltradeagreementsbeingnegotiatedbythemajortradingnationsinAsiaandEuropethreatentoexcludeIndiaandplaceitsexportsatacompetitivedisadvantage.

Indiaisincreasinglyyoung,middleclass,andaspirationalbutremainsstubbornlymale.Severalindicatorssuggestthatgenderinequalityispersistentandhigh.Intheshortrun,therenewedemphasisonfamilyplanningtargets,backedbymisalignedincentives,isunderminingthehealthandreproductiveautonomyofwomen.

FiscalFramework

Indiamustadheretothemediumtermfiscaldeficittargetof3percentofGDP.Thiswillprovidethefiscalspacetoinsureagainstfutureshocksandalsotomoveclosertothefiscalperformanceofitsemergingmarketpeers.

Indiamustalsoreversethetrajectoryofrecentyearsandmovetowardthegoldenruleofeliminatingrevenuedeficitsandensuringthat,overthecycle,borrowingisonlyforcapitalformation.

ExpenditurecontrolcombinedwithrecoveringgrowthandtheintroductionoftheGSTwillensurethatmediumtermtargetsarecomfortablymet.

Intheshortrun,theneedforacceleratedfiscalconsolidationislessenedbythedramaticallychangedmacrocircumstancesandthelessthanoptimalnatureofprocyclicalpolicy.TheabilitytodosowillbeconditionedbytherecommendationsoftheFourteenthFinanceCommission(FFC).

Nevertheless,toensurefiscalcredibilityandconsistencywithmedium

termgoals,theprocessofexpenditurecontroltoreducethefiscaldeficitshouldbeinitiated.Atthesametime,thequalityofexpenditureneedstobeshiftedfromconsumption,byreducingsubsidies,towardsinvestment.

Finally,implementingtheFFCrecommendationswillleadtostatesaccountingforalargeshareoftotaltaxrevenue.Thishastheimportantimplicationthat,goingforward,Indiaspublicfinancesmustbeviewedattheconsolidatedlevelandnotjustatthelevelofthecentralgovernment.Ifrecenttrendsinstatelevelfiscalmanagementcontinue,thefiscalpositionattheconsolidatedlevelwillbeonasustainablepath.

SubsidiesandtheJAMNumberTrinitySolution

Thedebateisnotaboutwhetherbuthowbesttoprovidesupporttothepoorandvulnerable.Thegovernmentsubsidisesawidevarietyofgoodsandserviceswiththeaimofmakingthemaffordableforthepoor,including:rice,wheat,pulses,sugar,railways,kerosene,LPG,naphtha,ironore,fertiliser,electricity,water.

ThedirectfiscalcostoftheseselectsubsidiesisroughlyRs.378,000croreor4.2percentof201112GDP.Thisisroughlyhowmuchitwouldcosttoraisetheexpenditureofeveryhouseholdtothelevelofa35 percentilehousehold(wellabovethe21.9percentTendulkarCommitteepovertyline).

Arethesesubsidieseffectivelytargetedatthepoor?Unfortunately,subsidiescansometimesberegressiveandsufferfromleakages.Forexample,electricitysubsidiesbydefinitiononlyhelpelectrifiedhouseholds.Eveninthecaseofkerosene,41percentofPDSkeroseneislostasleakageandonly46percentoftheremaining59percentisconsumedbyhouseholdsthatarepoor.

TheJAMNumberTrinityJanDhanYojana,Aadhaar,MobilecanenabletheStatetotransferfinancialresourcestothepoorinaprogressivemannerwithoutleakagesandwithminimaldistortingeffects.

th

TheInvestmentChallenge

Thestockofstalledprojectsstandsatabout7percentofGDP,accountedformostlybytheprivatesector.Manufacturingandinfrastructureaccountformostofthestalledprojects.Changedmarketconditionsandimpededregulatoryclearancesaretheprominentreasonsforstallinginprivateandpublicsectors,respectively.

Thishasweakenedthebalancesheetsofthecorporatesectorandpublicsectorbanks,whichinturnisconstrainingfutureprivateinvestment,completingaviciouscircle.

Despitehighratesofstalling,andweakbalancesheets,thestockmarketvaluationsofcompanieswithstalledprojectsarequiterobust,whichisapuzzle.

CombiningthesituationofIndianpublicsectorbanksandcorporatebalancesheetssuggeststhattheexpectationthattheprivatesectorwilldriveinvestmentneedstobemoderated.Inthislight,publicinvestmentmayneedtostepintorampupcapitalformationandrecreateanenvironmenttocrowdintheprivatesector.

TheBankingChallenge

TheIndianbankingbalancesheetissufferingfromdoublefinancialrepression.Ontheliabilitiesside,highinflationloweredrealratesofreturnondeposits.Ontheassetsside,statutoryliquidityratio(SLR)andprioritysectorlending(PSL)requirementshavedepressedreturnstobankassets.Asinflationmoderatesandthebankingsectorexitsliabilitysiderepression,itisagoodtimetoconsideraddressingtheassetsidecounterpart.

Inacrosscountrycomparison,controllingforthelevelofdevelopment,thesizeoftheIndianbankingsystem,measuredbycreditindicators,doesnotseemtoohigheitherinabsolutetermsorrelativetoother

sourcesoffinancing.However,goingforward,capitalmarketsandbondfinancingneedtobegivenaboost.

PrivatesectorbanksdidnotpartakeinthebiggestprivatesectorfuelledgrowthepisodeinIndianhistoryduring20052012.Thisisreflectedinthenearconstantshareofprivatesectorbanksindepositsandadvancesinthoseyears.

Thereissubstantialvariationintheperformanceofthepublicsectorbanks,sothattheyshouldnotbeperceivedasahomogenousblockwhileformulatingpolicy.

PuttingPublicInvestmentonTracktheRailRoutetoHigherGrowth

TheIndianRailwaysovertheyearshavebeenonaroutetonowherecharacterizedbyunderinvestmentresultinginlackofcapacityadditionandnetworkcongestionneglectofcommercialobjectivespoorserviceprovisionandconsequentfinancialweakness.Thesehavecumulatedtobelowpotentialcontributiontoeconomicgrowth.

VerymodesthikesinpassengertariffsandcrosssubsidisationofpassengerservicesfromfreightoperationsovertheyearshavemeantthatIndian(PPPadjusted)freightratesremainamongthehighestintheworld,withtherailwayscedingsignificantshareinfreighttraffictoroads(thatistypicallymorecostlyandenergyinefficient).

Asaresult,thecompetitivenessofIndianindustryhasbeenundermined.CalculationsrevealthatChinacarriesaboutthriceasmuchcoalfreightperhourvisvisIndia.CoalistransportedinIndiaatmorethantwicethecostvisvisChina,andittakes1.3timeslongertodoso.

Econometricevidencesuggeststhattherailwayspublicinvestmentmultiplier(theeffectofaRs.1increaseinpublicinvestmentintherailwaysonoveralloutput)isaround5.

However,inthelongrun,therailwaysmustbecommerciallyviableandpublicsupportmustbelinkedtorailwayreforms:adoptionofcommercialpracticestariffrationalizationandtechnologyoverhaul.

SkillIndiatoComplementMakeinIndia

WhatshouldweMakeinIndia?Sectorsthatarecapableoffacilitatingstructuraltransformationinanemergingeconomymust:

Haveahighlevelofproductivity.

Showconvergencetothetechnologicalfrontierovertime.

Drawinresourcesfromtherestoftheeconomytospreadthefruitsofgrowth.

Bealignedwiththeeconomyscomparativeadvantageand

Betradeable.

Registeredmanufacturing,constructionandseveralservicesectorsparticularlybusinessservicesperformwellonthesevariouscharacteristics.AkeyconcernwiththesesectorshoweveristhattheyareratherskillintensiveanddonotmatchtheskillprofileoftheIndianlabourforce.

IndiacouldbolstertheMakeinIndiainitiative,whichrequiresimprovinginfrastructureandreforminglaborandlandlawsbycomplementingitwiththeSkillingIndiainitiative.Thiswouldenablealargersectionofthepopulationtobenefitfromthestructuraltransformationthatsuchsectorswillfacilitate.

ANationalMarketforAgriculturalCommodities

MarketsinagriculturalproductsareregulatedundertheAgriculturalProduceMarketCommittee(APMC)ActenactedbyStateGovernments.Indiahasnotone,not29,butthousandsofagriculturalmarkets.

APMCslevymultiplefeesofsubstantialmagnitude,thatarenontransparent,andhenceasourceofpoliticalpower.

TheModelAPMCAct,2003couldbenefitfromdrawingupontheKarnatakaModelthathassuccessfullyintroducedanintegratedsinglelicensingsystem.Thekeyhereistoremovethebarriersthatmilitateagainstthecreationofchoiceforfarmersandagainstthecreationofmarketinginfrastructurebytheprivatesector.

ClimateChange

Indiahascutsubsidiesandincreasedtaxesonfossilfuels(petrolanddieselalongwithacoalcess)turningacarbonsubsidyregimeintooneofcarbontaxation.TheimplicitcarbontaxisUS$140forpetrolandUS$64fordiesel.

Inlightoftherecentfallingglobalcoalpricesandthelargehealthcostsassociatedwithcoal,theremayberoomforfurtherrationalizationofcoalpricing.Theimpactofanysuchchangesonaffordableenergyforthepoormustbetakenintoaccount.

Onthewhole,themovetosubstantialcarbontaxationcombinedwithIndiasambitioussolarpowerprogramsuggeststhatIndiacanmakesubstantialcontributionstotheforthcomingParisnegotiationsonclimatechange.

TheFourteenthFinanceCommission

TheFFCmarksawatershedinthehistoryofIndianfederalism.Unprecedentedincreasesintaxdevolutionwillconfermorefiscalautonomyonthestates.ThiswillbeenhancedbytheFFCinducedimperativeofhavingtoreducethescaleofothercentraltransferstothestates.Inotherwords,stateswillnowhavegreaterautonomybothontherevenueandexpenditurefronts.

Allstatesstandtogainfromextraresourcesalthoughtherewillbesomevariationbetweenthestates.

FFCtransfersarehighlyprogressivethatis,stateswithlowerpercapitaNSDPreceiveonaveragemuchlargertransferspercapita.Incontrast,plantransfersweremuchlessprogressive.

Theconcernthatmoretransferswillunderminefiscaldisciplineisnotwarrantedbecausestatesasawholehavebeenmoreprudentthanthecentreinrecentyears