economic survey 2015 india summary

7/25/2019 Economic Survey 2015 india Summary

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Theme - creating opportunity and reducing vulnerability.

Acombination of factorsweak corporate balance sheets, an impaired bankingsystem, diculty of e!it, the de"ciencies of the public private partnership#$$$% model in infrastructurecould hold back private investment goingforward. $rivate investment must remain the main engine oflong-run growth. &ut, in the short to medium term, as the near-intractableproblems get slowlyresolved, public investment, especially by the railways, will have to play acatalytic role

'ndia needs to follow what might be called a persistent,encompassing, andcreative incrementalism but with bold steps in a few areas that signal adecisive departure from the past and that are aimed at addressing keyproblems such as ramping up investment, rationali(ing subsidies, creating acompetitive, predictable, and clean ta! policyenvironment, and accelerating disinvestment.

)oreign portfolio *ows #of + /.0 billion since April 1230% have stabili(edthe rupee, e!erting downward pressure on long-term interest rates, re*ectedin the yield on 32-year government securities, and contributed to the surgein e4uity prices an overall macro-vulnerability inde! #56'% that combines acountry7s "scal de"cit, current accountde"cit, and in*ation - 1231 - 'ndia most vulnerable now a lot better.

'ndia ranks amongst the most attractive investment destinations, well above

other countries.Medium-term prospects will be conditioned by the balance sheetsyndrome with Indian characteristics, which has the potential tohold back rapid increases in private sector investment

The power of growth to lift all boats will dependcritically on its employment creation potential.

However, tentatively, one might say that employment growth and elasticity havedeclined in the 2000s compared to the !!0s" #inc labour $orce growth is ine%cess o$ employment growth, labour absorption will be a challenge" &e$orms and$aster economic growth will be central to meeting it"

The ob8ective should be to create a competitive, predictable, clean, ande!emptions-light ta! policy regime that will lower the cost of capital,incentivi(e savings, and facilitate ta!payer compliance.

9owever, the persistence of moderated oil prices seems highly probable for


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at least three reasons: weaker global demand, increased supplies, and theglobal monetary and li4uidity environment.

EXTERNAL SECTOR

'he outlook is $avourable $or the current account and its (nancing") likely sur$eit, rather than scarcity, o$ $oreign capital willcomplicate e%change rate management" &isks $rom a shi$t in *#monetary policy and turmoil in the +uroone need to be watchedbut could remain within controlThe ;&',in other words, will be on thetrident of the macroeconomictrilemma, struggling to reconcile capitalaccount openness and surging in*ows, monetarypolicy independence, andthe economy7scompetitiveness.

)our factors pose risks to the e!ternal situation:

renewed fnancial market volatility in response to US Federal Reservemonetary tightening which is expected\ later this year;

possible turmoil i the viability o the !uro"one were to come into #uestionin the event o a $reek exit;

a spike in oil prices related to geopolitical events; and

a slowly deteriorating international trade environment.

'n the medium-term, it is perhaps the trade challenge that is a greater sourceof concern;eserves provide a cushion against shocks, creating economic and "nancial

resilience. &ut they also create geo-political in*uence. Today,


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improved all "scalaggregates, *ows and stocks. &ut failure to control e!penditure, especiallyrevenue e!penditure,towards the end of that phase, combined with e!cessive counter-cyclicalpolicies in the second

phase #122?-31% led to a loss of "scal control that contributed to the near-crisis of 123. A casualty has been low and stagnating capital e!penditure. 'nthe third phase #123-today%, a modicum of "scal stability has been restored.This history suggests the following strategy going forward. )irst, in themedium term, 'ndia must meet its medium-term target of percent of @=$.This will provide the "scal space to insure against future shocks and also tomove closer to the "scal performance of its emerging market peers. 't mustalso reverse the tra8ectory of recent years and move toward the golden rule7of eliminating revenue de"cits and ensuring that, over the cycle, borrowing isonly for capital formation.

econd, the way to achieve these targets will be e!penditure control ande!penditure switching from consumption to investment. And the seculardecline in capital e!penditure in the last decade has undermined 'ndia7s longrun growth potential. )rom 123B-3C, as growth gathers steam and as the @Tis implemented, the conse4uential ta! buoyancy when combined withe!penditure control will ensure that medium term targets can be comfortablymet. This buoyancy is assured by history because over the course of thegrowth surge in the last decade, the overall ta!-@=$ ratio increased by about1.C percentage points, from ?.1 percent in 122-20to 33.? per cent in 122C-2/ even without radical ta! reform.

Third, the medium-term commitment to discipline cannot result in anAugustinian deferment of actions. 'n the upcoming year, too, "scalconsolidation must continue. 9owever, the need for accelerated "scalconsolidation has lessened because macroeconomic pressures havesigni"cantly abated with the dramatic decline in in*ation and turnaround inthe current account de"cit.At the same time, the 4uality of e!penditure needs to be shifted fromconsumption, by reducing subsidies, toward investment.'ncreases in the ta!-@=$ ratio, stemming from the e!cise ta! increases onpetroleum products, will also help achieve both short and medium term "scalgoals

WIPING EVERY TEAR FROM EVERY EYE: THEJAM NUMBER TRINITY SOLUTION

'he debate is not about whether but how best to provide activegovernment support to thepoor and vulnerable" ash-based trans$ers based on the .)Mnumber trinity/.an han,)adhaar, Mobile/ o1er e%citing possibilities to e1ectively target


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public resources to thosewho need it most" #uccess in this area will allow prices to beliberated to per$orm theirrole o$ eciently allocating resources and boosting long-rungrowth"

Do nation can become great when the life chances of so many of its citi(ensare benightedby poor nutrition, limited by poor learning opportunities, and shrivelled bygenderdiscrimination recent Annual urvey of Education ;eport #AE;%, which

shows stagnation in learning outcomes over the past decade, makes for

sobering reading

Economic growth is good for the poor, both directly because it raisesincomes and because it

generates resources to invest in the public services and social safety netsthat the poor need. @rowth F and the prospects and opportunities that itbrings F also encourages individuals to invest in their own human capital. Arecent study found strikingly that merely informing families in villagesoutside &angalore that call centres were hiring educated women increasedthe likelihood that adolescent girls in those villages completed school?.9owever, growth must be complemented with eGective state-deliveredprograms that raise the living standards of the most vulnerable in society. Tobe successful, anti-poverty programs must recognise that policies shape theincentives of individuals and "rms, and also acknowledge the limitedimplementation capacity of the state to target and deliver public services to

the poor.

&oth the central and state governments subsidise a wide range of productswith the e!pressedintention of making these aGordable for the poor. ;ice, wheat, pulses, sugar,kerosene, H$@,naphtha, water, electricity, fertiliser, iron ore, railways F these are 8ust asubset of the productsand services that the government subsidises. The estimated direct "scalcosts of these #select%subsidies are about > C/,222 crore or about 0.1 percent of @=$. This is

roughly how much it would cost to raise the e!penditure of every householdto that of a household at the Ithpercentile of the income distribution32#which is well above the poverty line of 13.? percent33

$rice subsidies, no doubt provide help, but they may not have atransformative eGect on theeconomic lives of the poor. )or many subsidies, only a small fraction of thebene"ts actually accrue to the poor. )or e!ample, electricity subsidies bene"t


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mainly the #relatively wealthy% BC.1 percent of households that areelectri"ed31. A large fraction of subsidies allocated to water utilities are spenton subsidising private taps when B2 percent of poor households get theirwater from public taps3. 5oreover, the implementation of subsidies can be"endishly comple!. 'n the case of fertili(ers, they are "rm-speci"c and

import-consignment speci"c, they vary by type of fertili(er, and some are ona "!ed-4uantity basis while others are variable. ubsidies are alsosusceptible to the brutal logic of self-perpetuation. 'n the case of sugar, toprotect sugar cane producers high support prices are awardedJ to oGset thista! on mill owners, they are supported through subsidi(ed loans and e!portsubsidiesJ and then they are again ta!ed by placingrestrictions on sales of molasses that are produced as a by-product. =iGerentsubsidies also interact to hurt the poor. )or e!ample, fertiliser manufacturersdo not have the incentive to sell their product in hard-to-access regions,since price controls mean that prices are similar everywhere, so freightsubsidies on railways have been introduced to incentivise manufacturers

to supply their produce widely. &ut those subsidies are sometimesinsucient, since freight rates are among the highest in the world, andintentionally so, to cross-subsidise arti"cially low passenger fares. This is ane!ample of how a mesh of wellmeaning price controls distort incentives in away that ultimately hurt poor households.

;ecent e!perimental evidence documents that unconditional cash transfers Fif targeted well Fcan boost household consumption and asset ownership and reduce foodsecurity problems forthe ultra-poor


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Aadhaar numbers, and appro!imately ?20 million mobile phones3/. 't ispossible to envisage that when the KA5 trinity becomes linked, the goal ofperiodic and seamless "nancial transfers to bank accounts after identi"cationthrough the Aadhaar number can be implemented with immeasurablebene"ts to helpingthe lives of the poor. The heady prospect for the 'ndian

economy is that, with strong investments in state capacity, that %irvanatoday seems within reach. 't will be a %irvana for two reasonsthe poor willbe protected and provided forJ and many prices in 'ndia will be liberated toperform their role of eciently allocating resources and boosting long-rungrowth. Even as it focuses on second and third generation reforms in factormarkets, 'ndia will then be able to complete the basic "rst generationreforms. This will be the grand bargain in the political economy of 'ndianreforms.

'he balance sheet syndrome with Indian characteristics creates aweb o$ dicult

challenges that could hold back private investment" 3rivateinvestment must remain the primary engine o$ long-run growth" 4utin the interim, to revive growth and to deepenphysical connectivity, public investment, especially in the railways,will have an important role to play"

&ut increasing capital *ows are yet to translate into a durable pick-up of realinvestment, especially in the private sector. This owes to at least "veinterrelated factors that lead to what the &id'(ear!conomic )nalysis calledthe balance sheetsyndrome with *ndian characteristics+ )irst, hobbled by weak pro"tability

and weigheddown by over-indebtedness, the 'ndian corporate sector is limited in itsability to invest going forward #the *ow challenge%. Lne key indicator ofpro"tabilitythe interest cover ratio, which if less than one implies "rms7cash *ows are not sucient to pay their interest costshas also worsened inrecent years econd, weak institutions relating to bankruptcy means that theover-indebtedness problem cannot be easily resolved #the stock anddiculty-ofe!it7challenge%. This is re*ected in the persistence of stalled pro8ects which havebeen consistentlyaround C to / percent of @=$ in the last four years. Third, even if some of

these problems were solved, the $$$ model at least in infrastructure willneed to be re-fashioned to become more viable going forward #theinstitutional challenge%. )ourth, since a signi"cant portion of infrastructurewas "nanced by the banking system, especially the public sector banks, theirbalance sheets have deteriorated.3? )or e!ample, the sum of nonperformingand stressed assets has risen sharply, and for the $&s they account for over31 percentof total assets)inally, in a peculiarly 'ndian twist, this "nancing problem is aggravated by


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generali(ed risk-aversion#the challenge of inertial decision-making%. )or thepublic sector banks in particular, which are e!posed to governmentalaccountability and oversight, lending in a situation of D$As is not easybecause of a generic problem of caution, aMicting bureaucratic decision-making.

the 'ndian ;ailways could be the ne!t locomotive of growth)or e!ample,


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inability to increase their presence. 'ndeed, one ofthe parado!es of recent banking history is that theshare of the private sector in overall bankingaggregates barely increased at a time when thecountry witnessed its most rapid growth and one

that was fuelled by the private sector

econd, there is wide variation in the performanceof the public sector banks measured in terms ofprudence and pro"tability.

The diagnosis above #and in chapter I% leads to afour-fold policy response captured in 0 =s:deregulate, di-erentiate, diversiy, and disinter+#ource: RBI.

As the banking sector e!its the "nancial repressionon the liability side, aided by the fall in in*ation,this is a good opportunity to consider rela!ing theasset side repression. Easing H; re4uirementswill provide li4uidity to the banks, depth to thegovernment bond market, and encourage thedevelopment of the corporate bond market.econd, $H norms too can be re-assessed. Thereare two options: one is indirect reform bringingmore sectors into the ambit of $H, until in thelimit every sector is a priority sectorJ and the otheris to rede"ne the norms to slowly make $H moretargeted, smaller, and need-driven.There must be diGerentiation between the $&sand the recent approach to recapitali(ation adoptedby the government is a step in the right direction.Lne si(e "ts all approaches such as governancereform cannot be the most appropriate.=iGerentiation will allow a full menu of options suchas selective recapitali(ation, diluted governmentownership, and e!it.

=iversify77 implies that there must be greatercompetition within the banking system, includingliberal licensing of more banks and diGerent typesof banks. There must also be greater competitionfrom capital, especially bond, markets. )acilitatingthat will re4uire e!iting from asset side repression,namely the phasing down of the H;s which wouldalso help develop bond markets.=isinter77 implies that e!it procedures must


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become more ecient. =ebt ;ecovery Tribunalsare over-burdened and under-resourced, leadingto tardy resolution. The ownership structure andecacy of Asset ;estructuring


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without running into demand constraints,a feature that is important for a largecountry like 'ndia.'n 'ndia, it is important to remember that whenthinking about manufacturing as a transformational

sector it is registered or formal manufacturing thatpossesses some of the critical prere4uisites suchas high productivity and rapid growth inproductivity. +nregistered manufacturing cannotbe a transformational sector. Thus, eGorts toencourage formali(ation will be critical.

Lne policy conclusion that follows is that eGortsto improve the conditions for labor-intensivemanufacturing need to be complemented with rapidskill upgradation because skill-intensive sectors are

dynamic sectors in 'ndia and sustaining theirdynamism will re4uire that the supply of skills keeps

Ohat policyinterventions can help reali(e 5ake in 'ndia77They can be placed in three categories indecreasing order of eGectiveness and increasingorder of controversy.The uncontroversial responses consist of improvingthe business environment by making regulationsand ta!es less onerous, building infrastructure,

reforming labour laws, and enabling connectivityFall these would reduce the cost of doing business,increase pro"tability, and hence encourage theprivate sector, both domestic and foreign, toincrease investments. 'ndeed, these measureswould not 8ust bene"t manufacturing, they wouldbene"t all sectors.The ne!t set of responseswhat might loosely becalled industrial policy would target thepromotion of manufacturing in particular: providingsubsidies, lowering the cost of capital, and creating

special economic (ones #EPs% for some or allmanufacturing activity in particular.The "nal set of responseswhat might be calledprotectionistwould focus on the tradability ofmanufacturing, and hence consist of actions to:shield domestic manufacturing from foreigncompetition via tariGs and local contentre4uirementsJ and provide e!port-related


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incentives. The eGectiveness of these actions isopen to debate given past e!perience. 5oreover,they would run up against 'ndia7s e!ternalobligations under the OTL and other free tradeagreements, and also undermine 'ndia7s openness

credentials.The risk to avoid is undue reliance on the lattertwo, especially if it leads to detailed microintervention,involving sector-speci"c tariG and ta!changes and sector-speci"c grant of incentives. 'nthis conte!t, an intervention that can be immediatelyimplemented, that can have large impacts, and thatis win-win, is to eliminate the current negativeprotection facing 'ndian manufacturing

THE TRADE CHALLENGE

'rade outcomes have been stagnating" 'hetrading environment is becoming morechallenging as the buoyancy o$ Indiane%ports has declined with respect to worldgrowth, and as the negotiation o$ megaregionaltrading arrangements threatens toe%clude India"

Make ! I!"a## N$% &' P($%e)%!* &+% &' E,!a%!* Ne*a%e P($%e)%$!/+liminating all the e%emptions $or the countervailing duty 6:9 will eliminate thenegative protection $acingIndian manu$acturers, and help the ;;Make in India


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within Asia and between Asia and the +nited tateswill advance signi"cantly if and when the Trans-$aci"c $artnership #T$$% is negotiated and rati"ed.imilarly, the markets of Dorth American andEurope will be brought together if and when the

Trans-Atlantic Trade and 'nvestment $artnership#TT'$% are concluded. Together, these twoagreements will cover about half of world trade.And third,


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implicit positive price on carbon emissions

The health cost of coal for power generationin 'ndia is estimated to range from + .03 perton to + I3.33 per ton depending on the value

of statistical life.The olar 5ission isnow being scaled up "ve-fold from 12,222megawatts to 322,222 megawatts. This in eGectre4uires an additional investment of 322 billion +dollars. The aim of this initiative is primarily toprovide energy access to nearly 22 millionhouseholds. The collateral bene"t would be lowerannual emissions of


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C'),)a, )$!/"e(a%$!/'n the short-run, "scal policy serves as a cushion,stabili(ing demand and growth. A generallyaccepted rule is that from a demand managementperspective governments should not run a procyclical

"scal policy unless there are compellingfactors such as macro-economic overheating.

O!e-$12!e3 4a)%$(/The budget for 123I-3B will be confronted by anumber of one-oG factors. Lne one-oG factorQwindfall that favours further consolidation stemsfrom the windfall reduction in prices that willreduce the subsidy burden by about 2.1-2.percent of @=$. 9owever, there are threecountervailing factors.

S The )ourteenth )inance


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individuals and "rms face, and#iii% acutely conscious of the state7s ownlimited implementation capacity to targetand deliver services to the poor.

P()e /+&/"e/ a(e $4%e! (e*(e//e&y regressive, we mean that a rich householdbene"ts more from the subsidy than a poorhousehold.

't is not 8ust commodity subsidies that aresometimes regressiveJ subsidised services can beas well. $assenger tariGs on railways are heldarti"cially low F since 3??,

Leaka*e/ /e($+/,' +!"e(!e %0ee1e)%e!e// $4 5($"+)% /+&/"e/

reasons. )irst, the regressive nature of manyprice subsidies reduce their eGectiveness as antipovertystrategiesJ second, reducing subsidyleakages gives the government the "scal spacere4uired for higher-return social transfer programswithout causing welfare lossesJ and, third, the sameamount of bene"t that households gain throughsubsidies can be directly transferred to the poorthrough lump-sum income transfers, avoiding thedistortions that subsidies induce.

The KA5 Dumber TrinityF.an 1han (o2ana,)adhaar and Mobilenumbers F allows the state to oGer this supportto poor households in a targeted and less distortiveway.

Oe describe two alternative "nancial deliverymechanisms below:Mobile Money F Oith over ?22 millioncell phone users and close to B22 millionuni4ue users, mobile money oGers acomplementary mechanism of deliveringdirect bene"ts to a large proportion ofthe population.@iven that Aadhaarregistrations include the mobile number ofa customer, the operational bottlenecksre4uired to connect mobile numbers with


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uni4ue identi"cation codes is also small.Oith several cell phone operatorsreportedly applying for a payment banklicense in )ebruary 123I3C, mobile moneyplatforms oGer tremendous opportunities

to direct Aadhaar based transfers. 3ost =ces > 'ndia has the largest $ostalDetwork in the world with over 3,II,23I$ost Lces of which #/?.CB percent% arein the rural areas.3/ imilar to the mobilemoney framework, the $ost Lce #eitheras payment transmitter or a regular &ank%can seamlessly "t into the Aadhaar linkedbene"ts-transfer architecture by applyingfor an ')< code which will allow postoces to start seeding Aadhaar linked

accounts. The post oce network alsoen8oys a long-standing reputation of usingits deep network to serve manygeographically isolated consumers in thecountry.

C0-6- T0e I!e/%e!% C,a%e:S%a,,e"

P($7e)%/8 De&% Oe(0a!* a!" %0eE9+%' P+,e

'ndia7s investment has been much below potentialover the last few years. )rom a peak of 10 percent in the last 4uarter of 122?-32 "nancial year,the rate of growth of gross "!ed capital formationnow languishes around (ero

T$5 (ea/$!/ 4$( /%a,,!* a)($//

!"+/%(e/I!"+/%(' N$. $4 T$5 Rea/$!/P($7e)%/5anufacturing +nfavourable marketconditions5ining Hack of non-environmentalclearancesElectricity )uelQfeedstockQraw materialsupply problem


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ervices Hack of promoter interest


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into account.

econd, risk should only be transferred to those who can manage it. 'n a highway or arailway pro8ect, it is notsensible to transfer usage risk since it is outside the control of the operator. &ut, it can bedone in telecom pro8ects

and for individual port terminals that compete with each other, where demand can respondto tariG and 4uality.Third, "nancing structures should be able to attract pension and insurance funds, which area natural fundingsource for long-term infrastructure pro8ects.

Re/%(+)%+(!* $4 e=/%!* )$!%(a)%/;evival of private interest and bank lending needs e!isting contracts to be restructured, withburden sharing amongdiGerent stakeholders. Henders may have e!tended credit without necessary due diligence,assuming that pro8ectswere implicitly guaranteed. Oithout burden sharing, this behaviour will be reinforced.imilarly, many bidders mayhave assumed that they could renegotiate in the event of negative shocks. Thus, there waspotentially adverseselection of "rms who felt they had the capacity to renegotiateJ rather than "rms better ate!ecuting and operatingthe pro8ect.

*n practice, the S3R has become ameans o fnancing .at less than market rates

presumably/ a bulk o the government0s fscaldefcit, suggesting that S3R cuts are related to thegovernment0s fscal position+

&educing the #tatutory 8i7uidity &atio

4he S3R is a orm o fnancial repression where the government pre'empts domestic savingsat the expense o the

private sector+ Real interest rates are lower than they would be otherwise+


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Recently, the R5* has taken commendable and gradual steps in lowering the S3R rom 67per cent to 68+7 per cent+4he #uestion is whether the ambitions in this area should be ratcheted up+ 4hreedevelopments make this #uestion

particularly salient+4he argument has always been that S3Rs can only be reduced i the government0s fscal

situation improves+ 4hatis only partly correct because stocks rather than 9ows should condition S3R reorm+ *ndia0sfscal defcit situationstill needs consolidation but the public debt situation has been steadily improving and willcontinue to improvebecause o *ndia0s growth and in9ation compared to borrowing costs+ :verall indebtedness.center and states/ hasdeclined rom over < percent to =< percent in a decade+ )nd this trend will continuebecause avorable debtdynamics will continue to operate in the uture as long as growth remains above percent+4his creates the frst opening or phasing down the S3R over time+ 4o be sure thegovernment0s borrowing costswill go up but the magnitudes are likely to be small or two reasons> frst, costs will rise onlyon debt that is maturing,which over the next fve years is about 68+8 per cent o total outstading debt; and second,the macro'environmentand progress in durably reining in in9ation may avor lower real interest rates+4he second reason relates to the health o the banks+ )s interest rates decline, there isscope or capital appreciationor the banks that hold the bulk o government securities+ S3R reductions could allow themto o?oad $'secs andreap the capital gains which could help recapitalise them, reducing the need or governmentresources, and helpingthem raise private resources+ .4his is a better and cleaner way o recapitali"ing the banksthan to allow banks to marktheir $'secs to market and reali"e the accounting profts/+ 4o avoid any moral ha"ard issues,gains rom recapitali"ationshould go frst towards provisioning against %@)s, and only the surplus should go towardsbeing counted ascapital+4he third reason relates to the recent experience o inrastructure fnancing+ @@@'based

pro2ects have been fnancedeither by public sector banks or through oreign currency'denominated debt .!A5s/+ 4heormer has proven trickyto say the least and the latter contributed to decline in corporate sector proftabilityespecially in the inrastructuresector> investors borrowed in dollars and their revenues were predominantly in rupees sothat when the rupeedepreciated their proftability and balance sheets were adversely a-ected+4he time is thereore ripe or developing other orms o inrastructure fnancing, especially

through a bond market+5ut S3Rs have also stymied the development o government bond markets which in turnsti9es the development ocorporate bond markets+ Reducing S3Rs are thereore critical to fnding better sources oinrastructure fnancing+4he end'point o reorm should be to combine the S3R and the Aapital to risk weightedassets ratio .AR)R/a intoone li#uidity ratio set at a desirable level depending on international norms+


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A*()+,%+(a, C(e"%:

Total agricultural credit has increased substantially since the turn of the century.

There has been a sharp increase in the share of large-si(ed loans in agricultural credit

. There has been a substantial increase in share of agricultural credit outstanding thatemanates from urban and metropolitan areas, which is deeply pu((ling.0. There has been a concentration of disbursal of agricultural credit from Kanuary to 5arch,which are generally notthe normal periods of borrowing by farmers. This shows that in order to meet priority sectorlending targets bankspossibly raise their lending activity in months when farmers may not necessarily need it themost.I. There is a sharp decrease in the share of long-term credit in total agricultural credit. Thus,the portion of agriculturalcredit that was used for capital formation in agriculture has become small.

B. The implication of this evidence is that lending to agriculture may be e!cessive and goingpredominantly to large

farmers. 't is not being used for agricultural capital formation. $erhaps most signi"cantly alarge share of it maynot be going to core agricultural activities at all

Aapital to risk weighted assets ratio #


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aggregate demand and crowds in privateinvestment due to the complementary nature ofinfrastructure services. 'n the long run, a supplyside eGect also kicks in as the infrastructure built

feeds into the productive capacity of the economy.'ndeed, the two biggest challenges facingincreased public investment in 'ndia are "nancialresources and implementation capacity

bene"ts. An ecientrail freight network can help industry to transportraw materials at lower costs and also withassociated lower green house gas emissions,comparatively better energy eciency, andreduced congestion.

- congestion of rly

the 'ndian ;ailways"nd themselves in: underinvestment resulting in lackof capacity addition and congestionJ belowpotentialcontribution to economic growthJ neglectof commercial ob8ectives, poor service provision,and conse4uent "nancial weakness

H$3 +)0 &$$/% )a! &(a!% (a,3a'/

5($"e %$ %0e e)$!$'>i" ?orward and 4ackward 8inkages o$ the&ailways

;ailways are found to posses strong backwardlinkagesit appears thatincreasing the railway output by > 3 would increaseoutput in the economy by > .. This large multiplierhas been increasing over time, and the eGect isgreatest on the manufacturing sector. 'nvesting in;ailways could thus be good for 5ake in 'ndia.

)urther, there are sectors where railway servicesare an input to production #orward linkages%. A> 3 push in railways will increase the output ofother sectors by about > 1.I. This forward linkageeGect has declined over time but this is largelyendogenous to capacity constraints in the railwayssector which has led to reliance on other modes


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of transport.

a very large multiplier #over I%

ii" +1ects o$ public investment in railwayson overall output and private investment@)n econometric analysis

The ob8ectiveof keeping fares low for consumers has forcedhigh freight tariGs F high even by cross-countrystandards.

'n the long run, the railways must becommercially viable and public support forthe railways should be restricted to #i% e4uitysupport for investment by the corporati(ed

railways entities and #ii% for funding theuniversal service obligations that it provides.'n the interim, there is scope for publicsupport of railways, including throughassistance via the general budget.S 9owever, any public support should beclearly linked to serious reform: of thestructure of the railwaysJ of their adoptionof commercial practicesJ of rationali(ingtariG policiesJ and through an overhaul oftechnology.

9istorically, there have been three modes of escapefrom under-development: geology, geography, and8eans #code for low-skilled manufacturing%. 'nrecent years Oest Asia, &otswana and


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vehicle for prosperity early on.


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for the establishment of consumers7 and farmers7markets to facilitate direct sale of agriculturalproduce to consumersJ and #g% provides for thecreation of marketing infrastructure from therevenue earned by the A$5


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$+, at basic prices ) / *3 / 4 / production ta5es less production subsidies

$+, at factor cost $+, at basic prices - production ta5es less production subsidies

$%& $+, at basic prices / product ta5es - product subsidies

!where' ) compensation of employees6 * operating surplus6 3 mi5ed income6 and' 4 consumption

of fi5ed capital. &roduction ta5es or production subsidies are paid or received with relation to production and

are independent of the volume of actual production. *ome e5amples of production ta5es are land revenues'

stamps and registration fees and ta5 on profession. *ome production subsidies are subsidies to 7ailways'input subsidies to farmers' subsidies to village and small industries' administrative subsidies to corporations

or cooperatives' etc. &roduct ta5es or subsidies are paid or received on per unit of product. *ome e5amples of

product ta5es are e5cise ta5' sales ta5' service ta5 and import and e5port duties. &roduct subsidies include

food' petroleum and fertili8er subsidies' interest subsidies given to farmers' households' etc. through banks'and subsidies for providing insurance to households at lower rates".

!iii" omprehensive coverage of the corporate sector both in manufacturing and services by incorporation of

annual accounts of companies as filed with the inistry of orporate ,ffairs !," under their e-governance

initiative' ,21. 9se of ,21 database for manufacturing companies has helped account for activitiesother than manufacturing undertaken by these companies.

!iv" omprehensive coverage of the financial sector by inclusion of information from the accounts of stock

brokers' stock e5changes' asset management companies' mutual funds and pension funds' and the regulatory

bodies including the *ecurities and )5change :oard of 3ndia !*):3"' &ension 4und 7egulatory and%evelopment ,uthority !&47%," and 3nsurance 7egulatory and %evelopment ,uthority !37%,".

!v" 3mproved coverage of activities of local bodies and autonomous institutions' covering around ;0 per cent of

the grantstransfers provided to these institutions.

wing to these changes' estimates of $+, both at aggregate and sectoral levels have undergone changes. Thesector-wise shares in aggregate $+, have undergone significant revision especially in the case of manufacturing

and services !4igure 1". hanges have also been observed in the growth rates in $+,s of individual sectors and

contribution of each sector to overall $+, due to use of sales ta5 and service ta5 data for estimation in the years

2012-1< and 201


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soil' water' and commodities' and warehousing

and cold storage. 7ationali8ation of subsidies

and better targeting of subsidies would generatepart of the resources for public investment.

There are wide differences in yields between

states. )ven the best of states have much loweryield in different crops when compared to the

best in the world. This provides ample

opportunity to increase production by bridgingthe yield gap to the e5tent feasible within the

climatic 8one.

&roviding irrigation can improve yield

substantially' as vast cropped area is stillunirrigated. 4or a shift in production function'

investment in basic research would be

necessary.

7ecommendations of the *hanta >umarommittee provide useful suggestions for the

future road-map of food policy. )very effortshould be made to bring states on board for

creating a national common market for

agricultural commodities.

%istortions emerging from various policies'

including e5empting user charges for electricity

and water should be removed.

4or providing efficient advance price discoveryto farmers and enabling them to hedge price

risk' the 4orward arkets ommission should

be strengthened and empowered to regulatethe market more effectively.

,*)7 ? &adhe bharat :adjhe :harat initiative

G$$"/ Se()e/ Ta= GST

The introduction of the @T would be a signi"cant step in the "eld of indirect ta! reforms in'ndia. &y subsuminga large number of central and state ta!es into a single ta!, it would mitigate cascading ordouble ta!ation in a ma8orway and pave the way for a common national market. )rom the consumer7s point of view,

the biggest advantagewould be in terms of a reduction in the overall ta! burden on goods, which is currentlyestimated at 1I per cent-2 per cent. 'ntroduction of the @T is also e!pected to make 'ndian products competitive indomestic andinternational markets. tudies show that this would instantly spur economic growth. &ecauseof its transparentcharacter, it is e!pected that the @T would be easier to administer.

The broad features of the proposed @T model are as follows:


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#i% @T would be applicable on supply of goods or services as against the present concept ofta! on themanufacture or on sale of goods or on provision of services.#ii% @T would be a destination-based ta! as against the present concept of origin-based ta!.#iii% 't would be a dual @T with the centre and the states simultaneously levying it on acommon base. The @T

to be levied by the centre would be called central @T #


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vi(. land, labour, and capital. 9owever, in the near term, as @T replaces a number of state-level and central ta!es,revenue gains may not be signi"cant.

economic survey 2015 india summary

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